Sonic Healthcare Limited

Understanding 1H FY 2019 Results: Sonic Healthcare Limited (ASX: SHL) posted statutory net profit amounting to A$223 million for the half year to December 31, 2018 on the revenues of A$2.9 billion.The company’s top management had stated that it has performed well in half-year to December 2018 as its US, Swiss and Australian laboratory operations have achieved particularly robust earnings growth. They reflected positive views about the revenue of the US business increased 8% organically in 1H FY 2019 which the management believes is well above the market, driven in part by the success of hospital laboratory joint ventures as well as early wins from the billing system enhancement project.


1H FY 2019 Revenue Split (Source: Company Reports)

With respect to capital management, the company wrapped up A$600 million institutional equity placement in the month of December 2018 to part-fund the Aurora acquisition.It had wrapped up the Share Purchase Plan for retail shareholders in the month of February 2019, as a result of which, it raised A$328 million. The company stated that it has a robust balance sheet and substantial headroom for further acquisitions. Coming to the dividends, the company had made an announcement of interim dividend amounting to 33 cents per share in 1H FY 2019 which reflects the growth of 3.1% on the YoY basis.

What To Expect From SHL: The company is well set for witnessing the ongoing robust growth and there is a rich pipeline of acquisitions, joint ventures as well as contracts ahead. The company also stated that geographical diversification provides growth opportunities and risk mitigation. The company possesses stable and dynamic global management teams. There are expectations that the strategic acquisition of Aurora Diagnostics (which was wrapped up in the month of January 2019) might be augmenting the future growth.

The company has provided upgraded FY 2019 guidance (including Aurora) and stated that its EBITDA growth would be in the range of 6-8% on the underlying FY 2018 EBITDA of A$962 million (on the constant currency basis).There are expectations that its effective tax rate would be approximately 25%.

Stock Recommendation: The company is having a current ratio of 1.81x which is higher than the industry median of 1.66x reflecting that the company is having a better liquidity position to meet the short-term obligations. Also, the higher liquidity levels provide the company with significant opportunities to make deployments towards its business activities which could help in the long-term growth. The company’s management stated that they are planning to work with Aurora’s management as well as pathologists in order to grow and enrich both anatomical pathology and clinical laboratory operations of the expanded US business. The stock of SHL has witnessed a rise of 16.02% in the span of the previous six months and, in the time frame of three months, there was a rise of 12.20%. Currently, the stock is trading towards its 52-week higher level of $27.00. We presume that the stock price might witness some price correction in the near term. Therefore, it can be assumed that most of the primary growth drivers have already been discounted in the company’s current trading price. Hence, we have a watch stance on the stock at the current market price of A$26.350 per share (up 0.496% on 7 May 2019), suggesting that the investor should wait for a few more trading sessions to get the better levels for entry.
 

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