Stocks’ Details

Sonic Healthcare Limited

Decent Growth in Revenue and NPAT:  Sonic Healthcare Limited (ASX: SHL) is engaged in the provision of medical diagnostic services and administrative services and facilities to medical practitioners. The market capitalisation of the company stood at $16.45 Bn as on 20^th August 2020. For FY20, the company reported revenue amounting to $6,860 million, reflecting a rise of 11%. This was supported by Aurora Diagnostics’ acquisition (completed 30 January 2019) and currency exchange rate movements. The company witnessed a growth of 7% in underlying net profit to $552 million. Underlying EBITDA for the period amounted to $1,109 million.

The company is playing a key role in COVID-19 pandemic testing, enabling the treatment, contact tracing and quarantining. However, its base business revenue was impacted by social restrictions and fear of infection in the month of March, April, and May 2020, with the fall in the margin.

Key Financials (Source: Company Reports)

Outlook: The company stated that revenue growth rates in July and August 2020 were higher as compared to historical rates. This was enhanced by strong COVID-19 testing volumes. However, the outlook is sensitive to fluctuations in base business and COVID-19 testing revenues. The company has scheduled to conduct its Annual General Meeting on 12^th November 2020.

Key Risks: The company’s business could be impacted by changes in the currency exchange rates between the Australian dollar and the currencies of its offshore operations. In addition, revenues and reputation of the company may face risk due to loss of license or accreditation to operate one or more of the businesses.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The company closed FY20 with a healthy balance sheet comprising liquidity of $1.4 billion. For FY20, SHL declared a final dividend of $0.51 per share. The company seems to be well-placed for future growth on the back of well-established brands, leading market positions, its embedded Medical Leadership culture, and a strong balance sheet. On the technical analysis front, the stock of the company has a support level of ~$30.152 and a resistance level at ~$37.991. We have valued the stock using the P/E multiple based illustrative relative valuation method, and for the purpose, we have taken peers such as Cochlear Ltd (ASX: COH), Ramsay Health Care Ltd (ASX: RHC), ResMed Inc (ASX: RMD), etc., and arrived at a target price of high single-digit upside (in percentage terms). Thus, considering the decent performance in FY20, a key role in dealing with COVID-19, and a strong balance sheet, we give a “Hold” recommendation on the stock at the current market price of $35.060 per share, up by 1.388% on 20^th August 2020.

Pro Medicus Limited

Signing of Key Contacts: Pro Medicus Limited (ASX: PME) is involved in the development and supply of software and IT solutions to the public and private health sectors. The market capitalisation of the company stood at $2.63 Bn as on 20^th August 2020. During FY20, the company has inked three contracts, which include a $9 million five-year contract with Ohio State University, a $6 million five-year deal with Nines Inc and a $22 million five-year contract with Northwestern Memorial HealthCare. These contracts expand its rising footprint in the academic hospital segment and regionally-based community hospitals. During FY20, the company reported revenue amounting to $56.8 million with a rise of 23.9% and experienced a growth of 20.7% in the bottom line (NPAT) to $23.1 million.  For FY20, the company declared a fully franked final dividend amounting to 6 cents per share. This took the total FY20 dividend to 12 cents per share, reflecting a rise of 14.3%.

Revenue (Source: Company Reports)

Future Aspects: The company possesses a strong pipeline, which continued to grow even during the COVID pandemic. In addition, PME continues to build research/collaboration relationships through its AI Accelerator platform with many of its academic clients that have active AI programs in place.  The company will conduct its 2020 Annual General Meeting on 18^th November 2020.

Key Risks: The company is mainly exposed to a variety of financial risks arising from financial instruments. These include foreign currency risk, interest risk and credit risk.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The company experienced a rise in closing cash balance of 34.3% to $43.4 million. PME ended the financial year 2020 with a strong debt-free balance sheet. Net margin of the company stood at 40.5% in FY20, reflecting YoY growth of 2.5%. This indicates that the company has improved its capabilities to convert its top-line into the bottom-line. On the technical analysis front, the stock of the company has a support level of ~$22.35 and a resistance level at ~$29.975. We have valued the stock using the P/E multiple based illustrative relative valuation method, and for the purpose, we have taken peers such as Cochlear Ltd (ASX: COH), Ansell Ltd (ASX: ANN), EBOS Group Ltd (ASX: EBO), etc., and arrived at a target price of low double-digit upside (in percentage terms). Therefore, considering the signing of three contracts, strong pipeline, growth in cash reserves and a debt-free balance sheet, we give a “Hold” recommendation on the stock at the current market price of $24.680  per share, down by 2.489% on 20^th August 2020.

Pacific Smiles Group Limited

Opening of New Dental Centres: Pacific Smiles Group Limited (ASX: PSQ) is engaged in the operation of dental centres at which independent dentists’ practice and provide clinical treatments and services to patients. The market capitalisation of the company stood at $224.13 Mn as on 20^th August 2020.  During FY20, the company opened 5 new dental centres in Robina and Mitchelton in Queensland and Epping, Ocean Grove and Narre Warren in Victoria, which took the network to 94. Underlying EBITDA for the period amounted to $23.5 million, reflecting a rise of 2.9% over pcp. Patient fees generated by the dental practitioners during FY20 stood at $186.3 million, which contracted by 0.6%.

The company has decreased the salaries and fees of Chief Executive Officer and Executive Leadership team and Non-Executive Director for a period of time, in order to reduce the cost base and preserve cash during the nationwide restrictions caused by COVID-19.

Key Financials (Source: Company Reports)

Focus for Future: The long-term plans of the company revolve around growing the core business via its unique greenfields centre expansion program.  For FY21, the company is planning to open around 10 new dental centres. In addition, the company anticipates growth of 15% each in underlying EBITDA and patient fees.

Key Risks: The company’s business is sensitive to various risks like interest rate risk, credit risk, and liquidity risk. In addition, the business is also exposed to the risks posed by general economic conditions, reduction in private health insurance coverage, rising market share of competitors.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation:  During FY20, the company maintained a strong focus on cash management, which resulted in net debt of $6.7 million as of 30 June 2020. The company has decided not to pay a final dividend for FY20. On the technical analysis front, the stock of the company has a support level of ~$1.392 and a resistance level at ~$1.639. We have valued the stock using the price to cash flow multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). For the purpose, we have taken peers such as Opthea Ltd (ASX: OPT), Japara Healthcare Ltd (ASX: JHC), AFT Pharmaceuticals Ltd (ASX: AFP), etc. Hence, considering the strong focus on cash management, decent performance in FY20, expected growth in EBITDA and patient fees, we give a “Hold” recommendation on the stock at the current market price of $1.600 per share, up by 9.589% on 20^th August 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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