The pandemic is largely over, and Sonic Healthcare can get back to its core pathology and radiology diagnostics business. The legacy of COVID-19 for SHL is a healthy balance sheet and a growing pathology division. The next two years’ earnings will be much lower.
Now that PCR testing is falling away, the real test for SHL is to ensure its core business is performing. SHL did better than the market in Pathology and Radiology when compared to Medicare data in FY22 and the base business is taking market share. COVID testing will not completely go away as routine testing is likely to be maintained and testing for variants will be required.
SHL acknowledged that COVID PCR testing had declined to $94 million in July, half the FY22 monthly average. The company thinks PCR volumes will settle below July levels, roughly equivalent to 80-90% below the peak although that figure was never disclosed. Some jurisdictions such as Switzerland and USA are planning further cuts across COVID and routine testing.
The total number of Australian pathology collection centres on 19 August 2022 was 6,635, up 2.6% on last year. Of the major operators, Healius is down 1.9% to 2,025, SHL is up 0.4% to 2,037 and Australian Clinical Labs reached 1,346 in July.
SHL has completed $294 million of its $500 million buyback. The company has no exposure to rising interest rates given it has $812 million of long-term fixed rate notes as funding. The balance sheet will be net cash positive at the end of FY23f and can retire all debt by the end of FY24f based on forecast cash flows. The company has about $1.3 billion of headroom and management has identified USA, Germany, and the UK as potentially the biggest opportunities for growth.
Investment view
SHL did not provide guidance for FY23f, but the net result of a revived core business and the capital plan will still see earnings for the next two years falling well below the COVID-boosted FY22 result. Consensus forecasts for FY23f and FY24f currently sit at -43% and -49% below FY22 indicating the outsized benefit SHL has been gifted.
The opportunity for SHL to redeploy that windfall presents some upside risk to earnings depending on timing and size. Even this likely positive outcome will fall well short of the gap left by the COVID earnings decline.
The on-going buyback also provides some support for the share price in the short term.
Risks To Investment View
COVID may reappear as a new variant which would restart the testing diversion. SHL is subject to competition in the pathology market and could lose share.
Recommendation
We have retained our Hold recommendation.
FIGURE 1: FY22 RESULT
