Company Overview: Sonic Healthcare Limited (ASX: SHL) is a medical diagnostic company, which is engaged in providing laboratory and radiology services to medical practitioners across operations in Australasia, Europe, and North America. The company started to trade on ASX in 1987.

SHL Details

SHL Rides on Geographical Expansion & Acquisition Synergies: SHL has achieved numerous strategic milestones, which will open new pathways for future growth. It further expects revenue to grow organically, backed by its strategies to utilise its unique culture, values, and structure. 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.

Key Developments; Analysis by Kalkine Group

Focus on 1HFY22 Key Numbers:

• Rise in Revenues: During the period, revenue stood at $4,757 million, increasing ~7% year over year. Base business revenue (ex-COVID testing) organically increased 4.3% and 2.5% in 1HFY22, compared to 1HFY21 and 1HFY20, respectively, on a constant currency basis. Growth amplified on the heels of robust operating leverage in laboratory division, margin expansion, and high volumes of COVID-19 testing during the period.
• Impressive EBITDA Growth: EBITDA stood at $1,540 million, up 18% year over year, demonstrating the operating leverage in its businesses. EBITDA went up by 20% in the Laboratory division on a constant currency basis, enhanced by COVID-19 testing.
• Increase in NPAT: In 1HFY22, net profit stood at $828 million compared to $678 million reported in 1HFY21. Earnings per share for the period came in at AUD 170.8 cents, up 21% on pcp. EPS was positively impacted by equity raisings associated with a recent acquisition, thereby maintaining a healthy balance sheet for further growth.
• Enhancing Shareholder’s Value: In 1HFY22, the company have declared an interim dividend of 40 cents (franked to 100%), compared to 36 cents in 2021. The dividend is payable on 23 March 2022 with a record date of 9 March 2022.
• Liquidity Position: At the end of 31 December 2021, the company’s cash and cash equivalents stood at $735.33 million. Net operating cash inflow was $1.04 billion in 1HFY22 compared to a cash inflow of $810.5 million in 1HFY21. The Group increased in net debt as a result of acquisitions in 1HFY22. Gearing ratio as at 31 December 2021 stood at 12.9x versus 12.5x as at 30 June 2021.

Geographical & Segmental Highlights; Analysis by Kalkine Group

Key Metrics: In 1HFY22, the company had a gross margin of 83%, higher than the 1HFY21 margin of 81.3%. It is also higher than the industry median of 37.5%. EBITDA margin and net margin in 1HFY22 stood at 32.4% and 17.9%, higher than the industry median of 10.5% and 9.9%, respectively.

Profitability; Analysis by Kalkine Group 

Buy-back of Shares: Recently, SHL announced that it plans to undertake an on-market buy-back of its shares up to a value of A$500 million. In 1HFY22, the company completed A$585 million of investments to enhance its future growth, including ProPath acquisition, Canberra Imaging Group acquisition, and strategic partnership with Harrison.ai.

Top 10 Shareholders: The top 10 shareholders together form around 24.82% of the total shareholdings, while the top 4 constitutes the maximum holding. Veritas Asset Management LLP and The Vanguard Group, Inc. are holding a maximum stake in the company at 4.9% and 3.96%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:  The company has reported growth in revenue aided by the surge in COVID-19 testing measures. However, if the pandemic recedes from its present levels, the company might challenge maintaining its earnings momentum. It also faces stiff competition in the sector from its peers, which may lead to margin pressure in the sale of its products. SHL’s line of business makes it prone to the risk of being under the watch of a prudent regulatory purview, which can impact its operations.

Outlook: In January 2022, revenues on a constant currency basis stood at A$818 million, up 18% on Y-o-Y basis. The company aims to generate significant cash from operations and maintain a healthy balance sheet. It remains on track to deliver significant value to its shareholders through the continuous payment of dividends, share buyback, and investment in new and latest know-how. SHL 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 essential part of the company’s growth prospects.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~20.44% in the past six months. Currently, the stock is trading near to its 52-week low level of A$30.21. The stock of the company has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount compared to its peers, considering the risks related to COVID-19, foreign currency risk, strict regulatory approval, etc. For the purpose of valuation, peers such as Healius Ltd (ASX: HLS), Cochlear Ltd (ASX: COH), and others have been considered. Considering geographical expansion, robust top-line and bottom-line growth, enhancing shareholder’s value, decent rise in segmental revenues, synergies from strategic acquisitions, current trading levels, and indicative upside in valuation, we recommend a ‘Buy’ rating on the stock at the closing market price of $34.24, down by ~1.298% as on 2 March 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

SHL Daily Technical Chart, Data Source: REFINITIV

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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