Get up to 2 Years of free subscription by inviting your friends to KALKINE!

For every friend of yours who joins KALKINE, we'll give you 3 months of free subscription (up to a limit of 24 months free subscription). If you recommend 3 friends and they join within a month of you referring them, you get 1 year free subscription to KALKINE reports added to your account (up to a limit of 24 months free subscription). Simply reply to this email with their name, e-mail and phone number.
 

Stock Of The Day - Sonic Healthcare (Expensive)

In today’s daily we cover Sonic Healthcare Limited  (SHL).  The company recently made an acquisition of a leading Swiss medical laboratory group Medisupport S.A for a mix of shares and cash. This is a logical step in the overall strategy of the company to strengthen its position in Europe. The acquisition will make SHL the number one player in the Swiss Laboratory market. Medisupport operates in 10 cities across Switzerland, employs 700 people, and has annual revenues of 160 million Swiss francs. The deal price represents a multiple of about 8 times Medisupport's 2015-16 earnings before interest, tax, depreciation and amortisation. Sonic said the deal is expected to boost earnings per share by 8 per cent initially and to drive further EPS increases after synergies have been realised.


Financial Highlights (Source - Company Reports) 

Sonic has a long history of successful acquisitions. The company has successfully executed and integrated 100 businesses till date. The company’s medical culture has served to attract like minded, high quality businesses each of which has provided incremental value and strength to the company. The company maintains a pipeline of synergistic opportunities at any point of time and maintains significant funding capacity to move forward with acquisitions at any point of time.  The company maintains a disciplined approach towards due diligence, compatibility and returns criterion ensuring it goes ahead with only a small percentage of acquisitions that it actually considers. 


The clinical Laboratory Process (Source - Company Reports)

Sonic is trying to place itself to benefit from a growing demand for diagnostic healthcare services. The company is a leading participant in pathology markets in Australia, Belgium, USA, Germany, Switzerland, UK and New Zealand. In Australia company also targets the diagnostic, imaging, medical centre and occupational health market. Part of company’s strategy is to maintain a global presence and consolidate its presence through acquisitions as well as organic growth and the latest acquisition of Medisupport is part of that strategy. An example of consolidation in an existing market through acquisitions is the Australian market where Sonic has a successful track record of consolidating a fragmented market of laboratories.  While the present focus of acquisitions is the current market, the company is likely to expand into new markets via acquisitions in the medium to long term. The company intends to maintain a conservative balance sheet while funding the acquisitions and always retains the key staff of the companies it acquires. 


Global Expansion (Source - Company Reports)

However the company itself admits that the conditions in many of the markets has been challenging and the company has not been able to register growth as per expectations. The company also has to put up with fee pressures in many of the markets. As a result of which company has to take many cost cutting initiatives. The long-term market growth rate in countries in which Sonic operates is around 5%. The market growth rate is supported by an ageing population, introduction of new tests and an increasing focus on preventive medication in the countries in which it operates. Acquisitions play a major role in registering the growth numbers. In last year’s annual report, the company mentioned that it experienced strong revenue growth in UK (12%), Switzerland (11%) and Germany 12% which were largely achieved due to acquisitions. Sometimes the growth in revenues comes at the cost of margins. For example a dilution of margin occurred when company acquired lower margin businesses in Germany. 


Sonic Healthcare Daily Chart (Source - Thomson Reuters)

Over the last five years the company has increased it’s net cash flow from operations from 429 million to 556 million. Over the same period the dividend paid per share has increased from 59 cents to 64 cents per share. These are not impressive growth numbers. The company’s revenue has increased from 2.9 billion in 2010 to 3.9 billion in 2014, which is an increase of approximately 34% in revenue over a period of five years. The company’s net profit after tax has increased from 293 million in 2010 to 384 billion in 2014, which is an increase of approximately 31% in net profit after tax over a period of five years. The company’s leverage ratio (defined as ratio of assets to equity) is a healthy 1.83 in 2014, while it was 1.92 in 2010. The company’s interest coverage ratio has ranged from 9.4 to 10.7 in the last five-year period, which implies that the company has significant unused debt capacity. 

The company is currently trading at a stock price of $21.62, which is somewhere close to the 52 week high of 21.380 and further from the 52 week low of 21.130. At the current price the company is trading at a Price to Earnings multiple of 22.88 and a dividend yield of 3.19%. There are other companies in the sector are trading at a similar P/E ratio and yield.
 
Given the less than stellar growth in revenues and profit achieved by company over a period of five years, we believe that the stock is expensive at the current price of $21.62.