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The company recently provided earnings guidance whose highlights were that FY2015 EBITDA is expected to be approximately A$730 million, before expensing non-recurring costs totaling approximately A$13 million. FY2016 EBITDA is expected to be in the range of A$850-875 million (at current exchange rates), up approximately 20% on FY2015 expected statutory EBITDA. This guidance excludes future acquisitions and potential earnings from the proposed contract with Alberta Health Services, due to uncertainty around the commencement date. The expected FY2015 EBITDA is 3-4% lower than guidance previously provided, largely due to issues impacting the Australian Pathology market. These issues were lower volumes than anticipated in recent months and a more significant impact than previously modelled of the 1 November 2014 changes to fees and descriptors for certain tests under the Medicare Benefits Schedule; and further escalation of specimen collection infrastructure costs. The company also recently completed the acquisition of KLD Laboratory. KLD was founded in 1994 and is one of the leading laboratories in the West of Flanders. It is located between Sonic ?s existing laboratory sites in Antwerp, Bruges and Mouscron and has annual revenues of approximately €14 million. KLD’s founder will join Sonic ?s Belgian team following the transaction. The KLD transaction is immediately EPS accretive, will be accretive to Sonic’s return on invested capital in FY2016, and has been funded from existing cash and debt facilities.
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Revenue Split (Source - Company Reports)
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As a leading participant in the pathology markets in Australia, the USA, Germany, Belgium, Switzerland, the UK/Ireland and New Zealand, and in diagnostic imaging, medical centres and occupational health in Australia, Sonic is well placed to benefit from the expected continued growth in demand for diagnostic healthcare services. The company made strong progress in the last year in achieving synergies and cost reductions in the offshore businesses, especially in Germany and the USA. The management team remains focused on growing the returns on the investments we have made in these large, fragmented markets, whilst also continuing to consolidate them through acquisitions and organic market share gain. The company remains strong and stable and is very well positioned for ongoing global success in the expanding healthcare markets in which Sonic operates. The operations around the world are all performing strongly, particularly in light of challenging local market conditions in selected countries. Increasing volume growth in the USA is a very welcome recent trend, after a number of years of low market growth in laboratory medicine. Fee pressures in some of the markets appear to have abated, and cost initiatives and renewed growth are having positive impacts.
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Australian Pathology Volume Growth (Source - Company Reports)
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Sonic has an enviable track record of successfully executing and integrating around 100 acquisitions to date. The medical culture has served to attract like-minded, high-quality businesses, each of which has provided incremental expertise and value to the strength and stature of the company. At any point in time, the company preside over an active pipeline of synergistic opportunities for consideration and the company maintains significant funding capacity to enable us to move forward rapidly with acquisitions, should they meet its criteria. However, its disciplined approach towards due diligence, compatibility and return criteria, means that the company only proceed with a small percentage of the opportunities which are presented to it. It is the company’s long held view that it is better to pass up an opportunity than to proceed with a transaction that may threaten hard-earned shareholder value. Furthermore, it is arguably true to say that Sonic’s current valuation as a company is as much a result of the many acquisitions declined over time, as it is of the acquisitions completed to date.
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However the company has registered a moderate EPS growth from) 0.59 AUD to 0.64 AUD in the last five years. Net cash flow from operations have increased from 429 million to 556 million in the last five years. Gross revenue has increased from 2.9 billion to 3.9 billion in the last five years. Net Profit has increased from 293 million to 285 million in the last five years. EBITDA has increased from 544 million to 733 million over the same period. These are not very impressive growth numbers. The long-term market growth trend applicable to countries in which Sonic operates is approximately 5%. This market growth trend continues to be supported by the ageing of the population, the introduction of new tests, especially in the field of genetics, and the increasing focus on preventative medicine.
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SHL Dividends (Source -ASX)
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The company is currently trading at a stock price of $20.25. The company is currently trading at a Price to earnings ratio of 21.8 and a dividend yield of 3.32%. The company has earnings per share of 0.952 AUD. The 52-week high stock price of the company is 23.7 and 52 week low of 16.5.Given the fact that the company has not grown much in the last five years; we believe that the stock is expensive at the current price of 20.25.
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