Company Overview: Sonic Healthcare Limited is one of the top medical analytical companies in Australia. The company is involved in offering laboratory as well as radiology services to medical physicians, hospitals, and their patients. The company operates in 8 countries, which include Australia, the USA, Germany, Switzerland, the UK, Belgium, Ireland, and New Zealand. The company has more than 37,000 employees, which includes around 1000 specialist pathologists, 200 radiologists and thousands of medical scientists and technicians. The company’s solid commitment to a culture of Medical Leadership has aided in enhancing operational and financial efficacy.
 

SHL Details



Synergies from Acquisitions & International Expansion are Key Growth Catalysts: Sonic Healthcare Limited (ASX: SHL) is one the largest medical diagnostic companies which is engaged in providing laboratory and radiology services to medical practitioners. Headquartered in Sydney, Australia, SHL is ranked amongst Australia's ‘Top 50’ companies on ASX. As on 18 March 2020, the market capitalization of the company stood at ~$13.92 billion.  SHL in its 1HFY20 results for the period ended 31 December 2019, reported revenues of $3,344 million, up 15% year over year.  Net profit for the period also increased by 15% and came in at $256 million. This increase was on the back of organic growth, as well as synergies from Aurora acquisition. EPS for the period increased by 3.5% to 53.7 cents per share.
 
The company remains in a healthy and a steady position and is anticipating organic growth in the coming years. For FY20, the company expects an increase of 6% to 8% on FY19 underlying EBITDA. The company remains on track to continue to enhance its services and efficiencies, which in turn will lessen the risk through geographical expansion. The company has achieved numerous strategic milestones, which in turn will open new pathways for future growth. The most important of these was the Aurora Diagnostics acquisition for a consideration of US$540 million. The company further expects revenue to grow organically, backed by the company’s strategies to utilise its unique culture, values and structure. 
 
The company witnessed a compound annual growth rate of 10.2% in revenue in the time span of FY15-FY19.The company has been investing in new technology and service enhancement. Further, the company’s focus on enhancing laboratory operations, synergistic business acquisitions and joint ventures, will drive future earnings. Net cash flow from operations grew at a CAGR of 13.4% over the same time span. The company further aims to generate significant cash from operations and maintain a healthy balance sheet. The company remains on track to deliver significant value to its shareholders through the continuous payment of dividends, and investment in new and latest know-how. SHL declared an interim dividend of 34 cents per share in FY20 (partially franked), payable on 25 March 2020.
 

Revenue Trend (Source: Company Reports)
 
1HFY20 Performance: During the period, revenue stood at $3,344 million, increasing 15% year over year. Organic revenue for the period increased ~5% year over year on a constant currency basis. Growth amplified on the heels of Aurora acquisition. The company witnessed margin accretion in both laboratory and imaging operations by ~10 basis points and ~40 basis points, respectively. Underlying EBITDA stood at $548 million, up 14% year over year. In 1HFY20, net profit stood at $256 million, as compared to $223 million reported in 1HFY19. Earnings per share for the period came in at 53.7 cents per share, as compared to 51.9 cents per share in pcp. EPS was positively impacted by equity raisings associated with Aurora acquisition, thereby maintaining a healthy balance sheet for further growth. It is worth mentioning that organic revenue growth was especially robust in the Australian, UK and Swiss laboratory businesses. Due to the organic growth along with devoted efforts to implement efficiency improvements, both the laboratory and Imaging divisions witnessed improvement in margins over the previous corresponding period.
 
 
1HFY20 Results (Source: Company Reports)
 
Geographical performance & Revenues Segregation in 1HFY20: During the period, total revenues with respect to USA, Australia, Germany, UK & Ireland, Switzerland and Belgium came in at $896 million, $771 million, $632 million, $240 million, $232 million and $74 million, respectively. Revenues from USA, Australia, Germany, UK & Ireland, Switzerland and Belgium, increased by 45%, 7%, 5%, 16%, 13% and 4%, respectively. 
 

Geographical Metrics (Source: Company Reports)
 
Balance Sheet & Cash Flow Detail: At the end of 31 December 2019, the company’s cash and cash equivalents stood at $436.23 million, as compared to $736.6 million at the end of 30 June 2019. Net operating cash inflow was $534.2 million in 1HFY20, as compared to a cash inflow of $368.5 million in 1HFY19. The Group continues to hold no debt. Cash generated from operations (excluding the impacts of AASB 16) was 3% higher as compared to the previous corresponding period. Gross operating cash flow in 1HFY20 was equal to 89% of EBITDA, which was primarily impacted by the timing of creditor payments. The company expects a favourable reversal in H2 FY2020.
 

Cash Flow from Operations (Source: Company Reports)
 
Sonic Imaging and Clinical Services: The company’s imaging revenues and earnings during 1HFY20 grew by 8% and 10%, respectively. Under the imaging business, the company started servicing public patients at Mater Hospital Brisbane. SHL also remained on track to improve via higher investments in greenfield sites and new equipment. Coming to SCS, revenues increased 3% year over year. This business segment is Australia’s top primary care and occupational health provider with ~229 centres and ~2,450 GPs.
 
 
 

Imaging & SCS Metrics (Source: Company Reports)
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 23.82% of the total shareholding. Veritas Asset Management LLP is the entity holding maximum shares in the company at 5.36%. BlackRock Institutional Trust Company, N.A. is the second-largest shareholder, with a holding of 4.04%.
 

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics: In 1HFY20, the company had a gross margin of 84.6%, which is higher than 1HFY19 margin of 83.5% and 1HFY18 figure of 83.6%, representing decent fundamentals. It is also higher than the industry median of 36.7%. EBITDA margin and net margin in 1HFY20 stood at 21.1% and 7.9%, higher than the industry median of 10.8% and 3.3%, respectively.
 
 
Key Metrics (Source: Thomson Reuters) 

Outlook: Going forward, the company remains on track to witness robust growth and strengthen its market position. The company is aiming for a strong Medical Leadership culture along with a healthy balance sheet. This will also aid the company in boosting significant financial flexibility. The company also aims to ride on synergistic acquisitions, joint ventures, and contract opportunities, especially in the US and European laboratory markets. Growing through organic revenues remains an important part of the company’s growth prospects. Further, increased investments in healthcare technologies and expanding its test menus like complex tests, genetic tests, provision of market leading e-health tools, and ongoing billing system enhancements, are likely to support the company’s growth trajectory. This is expected to lead to cost productivity, along with higher patient admissions, thus supporting both the top line and margins.
 
For FY20, the company anticipates underlying EBITDA growth of 6% to 8% on FY19 EBITDA figure of $1,052 million. Further, the company expects tax rate to be ~25% in FY20 and interest rate to decline by ~5% in constant currency. In FY20, SHL has taken the necessary measures to lower its capital expenditure. The company has also included PAMA fee reductions (USA) of ~2% of total group EBITDA in FY20 guidance. Over the past few years, the health care industry has started consolidating via mergers and acquisitions mainly due to the difficulties of healthcare reforms. The move has aided the players in establishing operational efficiencies and financial value for their business. SHL is taking essential measures to progress on laboratory platforms in the coming years, which will ultimately impact the company’s long-term growth and profit margins.
 
The deadly Covid-19 virus has proliferated to many countries like Austria, Italy, Israel, Switzerland, Croatia & Iran, leading to global mishaps and deaths. Notably, the healthcare executives have suggested that the disease can be a universal contagion, which is adequate to terrify investors. Healthcare companies worldwide are attempting to uncover a cure and control the outbreak. Given the spread of this disease, healthcare stocks could lead to massive gains, on the back of possible discovery of a cure.
 

 
Key Valuation Metrics (Source: Thomson Reuters)
Valuation Methodologies-
 
Method 1: Price to Earnings Multiple Approach
 

Price to Earnings Based Valuation (Source: Thomson Reuters)
 
Method 2: EV/Sales Multiple Approach
 

EV/Sales Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Stock Recommendation: The stock of the company generated positive returns of ~20.12% in the past one year. In 1HFY20, the company delivered a decent result, driven by positive contributions from the imaging and clinical services division and expects to thrive further on the back of population trends, increasing patient expectations and geographical expansion. From the analysis standpoint, the company has recorded revenue CAGR of 10.2% over the last four years. Considering the above factors, we have valued the stock using two relative valuation methods, i.e., Price to Earnings and EV/Sales based multiples, and have arrived at a target price with an upside of higher single digit (in % terms). For this purpose, we have taken peers such as Cochlear Ltd (ASX: COH), Ansell Ltd (ASX: ANN) and Healius Ltd (ASX: HLS). Hence, we recommend a “Buy” rating on the stock at the current market price of $26.53, down 9.485% on 18 March 2020.
 
 
SHL Daily Technical Chart (Source: Thomson Reuters)

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