Company Overview: Sonic Healthcare Limited (ASX: SHL) is one of the leading medical analytical companies in Australia, which is engaged in providing laboratory along with radiology services to medical physicians, hospitals, and their patients. The company has more than 37,000 employees, 1000 specialist pathologists, and 200 radiologists along with thousands of medical scientists and technicians. The company operates in 8 countries, which include Australia, the USA, Germany, Switzerland, the UK, Belgium, Ireland, and New Zealand.


SHL Details

 
 
SHL Rides on Higher Organic Revenues and Synergies from Buyouts: Headquartered in Sydney, Australia, Sonic Healthcare Limited (ASX: SHL) is a worldwide medical diagnostics company which provides laboratory and radiology services to medical practitioners. The company, over the years, has remained on track to develop its growth strategy and has proven its strength in cultural, financial, managerial, and operational space, thereby creating shareholders value and, providing excellent service to patients and doctors. In FY19, the company’s revenues grew 11.6% year over year, owing to higher organic revenue growth of approximately 4% on a constant currency basis. The company’s Australian, US and UK laboratory operations as well as Imaging division witnessed higher organic growth rates in the same time period. 
 
In 1HFY20, the company’s revenues and net profit increased by 15% each, year over year. Growth was augmented by organic growth, as well as synergies from Aurora acquisition. EPS for the period also increased 3.5% year over year, impacted by equity raisings linked with Aurora acquisition, thereby creating balance sheet flexibility for further growth.
 
The company has attained several strategic milestones, which has opened new avenues for future growth. The most important of these was the Aurora Diagnostics acquisition for a consideration of US$540 million. Going forward, the company is expecting further growth impetus in FY20, through the synergies from acquisitions, as well as ongoing organic growth and potential for further acquisitions.
 
The company remains on track to see robust growth and a bolstered market position. The company has a strong Medical Leadership culture along with a healthy balance sheet. This will 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.
 
The company has a track record of consistent growth in revenue, profitability, and shareholder returns. It reported a CAGR of 10.2% and 11.5% in revenue and EBITDA, respectively, for a time span of FY15-FY19. The company’s efforts to provide better care to patients, have led to high levels of laboratory and radiology services to medical practitioners. The company has been investing in new technology and service enhancement. 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.
 

Key Trends (Source: Company Reports)
 
1HFY20 Performance for the Period Ended 31 December 2019: During the period, revenue came in at $3,344 million, soaring 15% from $2,901 million reported in the prior corresponding period. On a constant currency basis, organic revenue for the period soared ~5% year over year. Synergies from Aurora acquisition, robust growth in Australian, UK and Swiss laboratory businesses, along with impetus in Imaging division, augmented growth during the period. SHL witnessed margin accretion in both laboratory and imaging operations by ~10 basis points and ~40 basis points, respectively.Underlying EBITDA increased 14% year over year to $548 million. 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.
 
The company has a strong foothold in the international markets and offers a range of more than 3,000 different tests. During the period, total revenues with respect to USA, Australia, Germany, UK & Ireland, Switzerland and Belgium, stood at $896 million, $771 million, $632 million, $240 million, $232 million and $74 million, respectively. 

1HFY20 Results (Source: Company Reports)
 
Sneak Peek into Sonic Imaging and Clinical Services: In 1HFY20, the company’s imaging revenues increased 8% year over year, whereas earnings went up 10%. 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.
 
 
 

Imaging & SCS Metrics (Source: Company Reports)
 
Strong Balance Sheet: The company exited the period with a cash balance of $436.23 million, as compared to $736.6 million at the end of 30 June 2019. The Group continues to hold no debt. Net operating cash inflow in 1HFY20 stood at $534.2 million, up from cash inflow of $368.5 million in 1HFY19. Cash generated from operations (excluding the impacts of AASB 16) was 3% higher as compared to the previous corresponding period. 
 

Cash Details (Source: Company Reports)
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 23.91% of the total shareholding.
 
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: With the number of confirmed COVID-19 cases rising with each passing day, the coronavirus crisis shows no signs of dissipating any time soon. It is being said that testing for the COVID-19 is the key for limiting the outbreak. As a worldwide laboratory company, SHL is presently playing a major role in battling the coronavirus pandemic. The company is taking crucial initiatives to test thousands of patients every day for COVID-19 in its laboratories situated in Australia, the USA and Europe. Further, the company remains on track to continue to increase its testing capacity to meet the needs of the communities in which it operates. The experts and experienced management teams as well as medical staff of SHL are working in close proximity of governments and other healthcare organisations to provide as much support as possible. Although, the company has withdrawn its previously provided FY20 outlook amid the ongoing uncertainty, given the spread of this disease, healthcare stocks may witness decent gains, on the back of possible discovery of a cure and regular testing implementation.
 
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 assisted the players in establishing operational competences 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.
 
Further, the company remains on track to continue to enhance its services and efficiencies, which in turn will lessen the risk through geographical expansion. Additionally, 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. 
 
 

Key Valuation Metrics (Source: Thomson Reuters)
 
Valuation Methodologies-
 
Method 1: EV/Sales Multiple Approach (Illustrative)

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

Price to Earnings Based Relative 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 ~11.07% and ~4.02% in the past one month and one year, respectively. At CMP of $25.06, the stock of the company is trading at a P/E multiple 20.64x with a dividend yield of 3.32%. The company has a market capitalisation of ~$12.16 billion and ~475.05 million outstanding shares. Currently, the stock is trading below the average of its 52-week high and low of $32.07 and $20.06, respectively, proffering an opportunity for share accumulation. 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 illustrative relative valuation methods, i.e., Price to Earnings and EV/EBITDA based multiples, and have arrived at a target price with an upside of lower double 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), etc. Hence, we recommend a “Buy” rating on the stock at the current market price of $25.06, down 2.071% on 22 April 2020.

 
 
SHL Daily Technical Chart (Source: Thomson Reuters)

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