Sonic Healthcare Limited

SHL Details

Robust Growth for Sonic Imaging: Sonic Healthcare Limited (ASX: SHL) is engaged in healthcare facilities with pathology/clinical laboratory services offered to patients in multiple countries like Australia, New Zealand, UK, the US, Germany, Switzerland, Belgium, and Ireland. SHL has registered a robust revenue and earnings growth in 1HFY21 through its Sonic Imaging segment. The segment has registered a 14% revenue growth in 1HFY21, and the company has registered an EBITDA growth of 19% in 1HFY21 without getting any government subsidies. 

1HFY21 Financial Highlights: SHL has reported an increase in its revenues to $4,432.23mn in 1HFY21 as compared with $3,340.58mn in 1HFY20. The company has posted a significant increase in its profits to $677.63mn in 1HFY21 as compared with $254.39mn in 1HFY20. The company has registered a decline in its cash and cash equivalent position to $856.84mn as on as on 31 December 2020 as compared with $1,230.14mn as on 30 June 2020.

Segment-Wise Revenue Growth (Source: Company Reports) 

Key Risks: The company is engaged in providing healthcare facilities in multiple countries. Any fluctuations in the foreign currency may have a severe impact on the financials of the company and may lead to financial losses for the company. The company needs to get its technology updated for utilising healthcare facilities. Therefore, any outdated technology may lead to business loss for the company. 

Outlook: As per the company report, SHL is expecting a robust 2HFY21, considering the revenue trend in the month of January and February 2021. The company is positive on the growing demand for Covid-19 serology testing. The company is likely to explore new opportunities or Joint Ventures in Australia, UK, Alberta Canada, going forward.

Valuation Methodology: Price/Earnings based Relative Valuation Method (Illustrative)

Data Source: Refinitiv, Thomson Reuters, 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: In the last one month, SHL has increased by ~13.04% and by ~5.55% in the last three months. The current market capitalisation of SHL stands at ~$16.95bn as of 13 April 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$22.72 - ~$38.00. On the technical analysis front, the stock has a support level of ~$34.96 and a resistance of ~$36.07. We have valued the stock using a Price/Earnings multiple based illustrative relative valuation method and arrived at a target price of a high single-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer average, considering the business growth across all its regions and registering higher profits in 1HFY21. For this purpose, we have taken peers Capitol Health Ltd (ASX: CAJ), Healius Ltd (ASX: HLS), Ramsay Health Care Ltd (ASX: RHC). Considering the company has posted higher revenues across all its regions and higher profits in 1HFY21, positive outlook, valuation, and current trading levels, we recommend a “Hold” rating on the stock at the current market price of $35.50, up by 0.056% as on 13 April 2021.

SHL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Cochlear Limited

COH Details

USFDA Clearance to Augment Business Revenues: Cochlear Limited (ASX: COH) is a medical device company that specialises in hearing aid equipment, which is implantable for people with conductive hearing loss, mixed hearing loss and single-sided deafness. Its segments include the Americas, EMEA and Asia Pacific. The company has recently received a USFDA clearance and CE Mark accreditation for its new Cochlear Baha 6 Max sound processor. The product is designed to improve hearing abilities for people with single-sided deafness or mixed hearing loss. The company reported that the product will be launched across the US and Europe, leading to business growth in different regions. 

1HFY21 Financial Highlights: The company has reported a decline in its sales revenue to $742.8mn in 1HFY21 compared with $777.6mn in 1HFY20. The company has registered a decrease in its underlying net profits to $125.3mn in 1HFY21 as compared with $132.7mn in 1HFY20. The company has registered an increase in its cash and cash equivalents position to $587.7mn as on 31 December 2020 as compared with $565.0mn as on 30 June 2020.

Liquidity Position (Source: Company Reports) 

Key Risks: The company is exposed to foreign exchange risk due to its dealing in multiple countries. Any significant fluctuation in the foreign currency may lead to financial losses for the company. The pandemic situation worldwide may result in decline in sales for the business and financial losses for the company. 

Outlook: As per the company report, COH expects to post an underlying net profit in a range of $225-245mn in FY21 (An increase of 46-59% over FY20). The company expects its capital expenditure to be ~$70mn for FY21 and maintaining it in a range of $60-$80mn for FY22.

Valuation Methodology: EV/Sales based Relative Valuation Method (Illustrative)

Data Source: Refinitiv, Thomson Reuters, 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: In the last one month, COH has increased by ~8.47% and by ~22.80% in the last three months. The current market capitalisation of COH stands at ~$14.57bn as of 13 April 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$176.13-~$238.52. On the technical analysis front, the stock has a support level of ~$218.98 and a resistance of ~$224.78. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with a correction of low single-digit downside (in % terms). We believe that the company can trade at a slight premium as compared to its peer median, considering, approval from USFDA for its hearing aid product, and launching of Cochlear Baha 6 Max sound processor in US and European regions. For this purpose, we have taken peers such as, Nanosonics Ltd (ASX: NAN), Ansell Ltd (ASX: ANN), to name a few. Considering the volatility in the market, decline in the company’s 1HFY21 revenues, decline in profits, associated risks with the business, valuation, and current trading levels, we are of the view that most of the positive factors have been discounted at the current juncture. Hence, we suggest investors to wait for better entry-level and give an “Expensive” rating for the stock at the current market price of $221.41, down by ~0.158% on 13 April 2021.

COH Daily Technical Chart (Source: Refinitiv, Thomson Reuters) 

Note: 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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