What goes up, must come down

RESULTS

Need To Know

• ~5% miss on FY23 EBITDA. FY24 guidance for $1.7-$1.8bn is a ~4% downgrade on consensus at the midpoint (~$1.85bn)
• Revenue was ahead of expectations on strong base business growth (11%), however offset by legacy Covid-related labour and infrastructure costs during the 2H
• Covid earnings are still causing a hangover, although the worst is most likely behind SHL

Result Overview:

Revenue $8,169m vs $8,145m consensus

EBITDA $1,708m vs $1,796m consensus

NPAT $685m vs $730m consensus

DPS 0.62cps in-line with consensus

Investment Implications

SHL's earnings are coming back down to Earth as the world returns to normal. Covid revenue fell 80% over the year to $485m, causing EBITDA to fall 40% and NPAT to fall 53%. The earnings results were below consensus as labour and Covid infrastructure costs hampered margins. The base business however continues to recover, growing organic revenue 7% (9% in 2H), and is up 13% on FY19. The progressive dividend policy was maintained increasing 2c to 62cps.

Australia and Germany were the standout performers, growing base business revenue 11% and 10% respectively. Recent acquisitions in Germany are set to be synergistic, and SHL noted there are 'further acquisitions under consideration'. The USA struggled growing just 4%, although strong Thyroseq revenue growth and a deferral of the PAMA Medicare fee cuts are still pending. SHL did note a successful implementation of an enhanced revenue collection system pilot, with a roll-out to commence during FY24, providing potential upside into future years.

Radiology continues to become a more important segment of SHL, growing organic revenue 11% and EBITDA 20% given a margin expansion from cost control. The successful strategy to expand into Victoria is gaining momentum, and recent Medicare data shows volume recovery continuing.

FY24 guidance came in below expectations, with SHL forecasting just 5% growth on FY23 EBITDA, to $1.7-1.8bn, a ~4% downgrade to consensus at the midpoint. Interest expenses are set to rise ~25% post recent acquisitions, although SHL still maintain an incredible strong balance sheet, with debt cover at just 0.6x, well below pre-Covid averages of ~2.4x.

Investment Implications

After stellar earnings throughout Covid, SHL is battling with the transition, impacting overall margins. Initiatives to drive efficiencies are underway, including investment in automation and AI. Recent acquisitions are also set to be synergistic, with other opportunities also under consideration.

Valuation still remains above long-term averages as the earnings base begins to normalise. We expect SHL will continue to struggle with elevated costs, although note that the worst is most likely behind the company.