Cochlear Limited

FY19 Operational Highlights:Cochlear Limited (ASX: COH) is the global leader in implantable hearing solutions. The market capitalisation of the company stood at $11.89 billion as on 11 October 2019. The company has scheduled its Annual General Meeting on 22^nd October 2019. The company reported sales revenue of $1,446.1 million, up 7% (2% in Constant Currency), with underlying net profit growing by 7% (6% in CC). The services revenue increased by 20% (14% in CC), with sound processor upgrade revenue reporting a growth of 17% in CC terms.

There was a decline in emerging markets’ units, with approximately 700 fewer Chinese Central Government tender units than the last year. The company also witnessed a significant decline in Argentina and Turkey due to weak economic environment and currency devaluation. However, it was further stated that robust growth was witnessed throughout many regions which included the Middle East and Eastern Europe, with shipment of number of tenders won in FY 2019 expected in FY 2020.
 

Products and Services Highlights (Source: Company Reports)
 
Outlook for FY20: Going forward, in FY20, the company is expecting to deliver a net profit of $290-300 million, up by 9% to 13% on the underlying net profit for FY19.The Management is expecting a strong growth in cochlear implants units in FY20 and this growth will be driven by the continued investment in market awareness and access activities and by the new products which were launched in late FY19.
 
Stock Recommendation: The stock has given a total return of -6.31% and 22.68% in the last three months and six months, respectively. Currently, the stock is trading at a P/E multiple of 43.190x on TTM basis, trading at higher valuation, if we compare it with the average of healthcare equipment and supplies sector. The stock is trading towards its 52-week high level of $226.710. Therefore, considering the above-stated facts, we recommend an “Expensive” rating on the stock at the current market price of $207.160 per share, up 0.685% on October 11, 2019.
 

Sonic Healthcare Limited

Sonic Healthcare to Raise US$550 million:Sonic Healthcare Limited (ASX: SHL) is one of the world’s largest medical diagnostics companies, which provides radiology and laboratory services to hospitals, medical practitioners, community health services and their collective patients. The market capitalisation of the company stood at $13.55 billion as on 11 October 2019.
Sonic Healthcare Limited has announced that it has priced notes of US$550 million in the United States private placement market. The transaction is expected to close in January 2020, after the final investor due diligence and documentation are completed. The total long-term debt funding is divided into three tenors: US$300 million of the notes will have 10-year of tenor; US$150 million will have 12 years of tenor and US$100 million will have 15 years of tenor, which will significantly increase Sonic’s debt maturity profile and the weighted average fixed coupon for the notes in 3.07%.

 
Highlights for FY19: Sonic Healthcare Limited reported another solid financial result in FY19, which was in-line with the company’s expectations.The company reported a revenue growth of 11.6% to $6.2 billion. The company has taken major steps for opening new pathways for future growth. These steps majorly include the expansion in the anatomical pathology markets in Germany and the USA by acquiring Pathology Trier and Aurora Diagnostics, respectively; winning the cervical screening contract to provide HPV testing for the people of London; the formation of a hospital laboratory joint venture with ProMedica Health System, Inc in the mid-west of the USA; and by positioning itself in the bidding processes for other National Health Service laboratory contracts in the UK. 

Annual Revenue History (Source: Company Reports)
 
The company has also divested technology platform, GLP Systems, at a good valuation, returning approximately $130 million of cash to Sonic.

At present, the company has a global team of more than 1,000 pathologists, 200 radiologists, 2,000+ partner GPs and many qualified scientists and technical staff that underpin and enrich global healthcare offering.
 
Guidance for FY20: The company has guided an EBITDA growth of 6%-8% on underlying FY19 EBITDA of $1,052 million (Constant Currency). Interest expenses are expected to increase by around 3% (on CC), and the effective tax rate is expected to be around 25%.Capital Expenditure is expected to be significantly lower in FY20.
 
Stock Recommendation: Currently, the stock is trading at a price to earnings multiple of 23.370x, which is above the industry median (healthcare providers and services) of ~14.5x. The company has an EV/EBITDA multiple of 14.3x, which is higher as compared to the industry average of 8.1x, indicating that the stock is trading at an expensive valuation. Also, the stock is trading towards its 52-week high level of $29.930 per share. Therefore, considering the above-stated facts, we give an “Expensive” rating on the stock at the current market price of $28.630 per share, up by 0.315% on October 11, 2019.

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