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 on 30 April 1987.

SHL Details

This report is an updated version of the report published on 15 June 2022 at ~3:55 PM GMT

Decent Operational & Financial Fundamentals Aid SHL: The company has recorded robust operational and financial performances in the last six months for the period ended 31 December 2021. In 1HFY22, the company completed A$585 million investments to enhance its future growth, including the ProPath acquisition, Canberra Imaging Group acquisition, and strategic partnership with Harrison.ai. The move will aid SHL in augmenting its anatomical pathology operations and management in the USA, garner additional revenue sources, and develop best-in-class AI diagnostic tools for anatomical and clinical pathology.

Revenue Split Highlights; Analysis by Kalkine Group

Emphasis on 1HFY22 Segmental Highlights: The company operates under three broad categories (1) Laboratory, (2) Radiology, and (3) Others.

• Laboratory Segment: The company’s laboratory services are provided in Australia, Germany, the United States of America, Switzerland, the UK & Ireland, Belgium, and New Zealand. Revenues from this segment came in at $4,180.9 million in 1HFY22, compared to $3,926.4 million reported in the year-ago period. The Laboratory division achieved organic revenue growth of 8%, with robust growth in the Australian market. Laboratory revenue included the acquisition of ProPath in the USA, and the disposal of the subscale Irish business in 2HFY21.
  

• Radiology: This segment deals with diagnostic imaging services provided in Australia. Revenues from the radiology segment came in at $353.3 million in 1HFY22, compared to $303.6 million reported in the year-ago period. Revenue grew 16%, including contributions from Epworth Medical Imaging (EMI) and Canberra Imaging Group acquisitions. EBITDA growth was 7% YoY.
  

• Others: This segment consists of corporate office functions, occupational health services, medical centre operations, and other minor procedures. Revenue from this segment came in at $223.9 million in 1HFY22, up from $202.2 million reported in the year-ago period. During the period, the occupational Health business had recovered sharply, with the continuous progress of SHL’s Sustainability/ESG initiatives over the last six months.

Financial Snapshot; Analysis by Kalkine Group 

Key Metrics: In 1HFY22, the company recorded an operating margin of 25.4%, higher than the 1HFY21 margin of 22.5%. ROE in 1HFY22 stood at 12.3%, higher than the industry median of 5.8%.

Profitability & Liquidity Profile; Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form around 24.7% 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 4.89% and 3.96%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:  

Key Risks; Analysis by Kalkine Group 

Outlook: 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. The company aims to generate significant cash from operations and maintain a healthy balance sheet. It remains on track to deliver substantial value to its shareholders through the continuous payment of dividends, share buyback, and investment in new and latest know-how.

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 ~21.82% in the past nine months. Currently, the stock is trading near to its 52-week low level of A$32.12. 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, forex headwinds, strict regulatory approval, etc. For the purpose of valuation, peers such as Healius Ltd (ASX: HLS), Cochlear Ltd (ASX: COH), Ansell Ltd (ASX: ANN) and others have been considered. Considering the above-mentioned factors, decent fundamentals in 1HFY22, geographical diversification, enhancing shareholder’s value, decent long-term outlook, synergies from acquisitions, current trading levels, and indicative upside in valuation, we recommend a “Buy” rating on the stock at the current market price of $32.565, as of 15 June 2022, 10:40 AM (GMT+10), Sydney, Eastern Australia.

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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