This pathology provider's FY23 result heralds a return to "business as usual"

The Sydney-based laboratory services, pathology and radiology services provider is among several healthcare companies that were direct beneficiaries of the COVID pandemic. Sonic Healthcare’s (ASX: SHL) share price climbed more than 110% from the low point of March 2020 up to the end of 2021.

It has dropped off since then and as Perpetual’s Anthony Aboud explains in his commentary of the firm’s FY23 result, Sonic’s numbers are still cycling off the pandemic period. But this return to “business as usual” for the firm can be a key positive, in the eyes of Aboud.

“For me, the positive is we’re starting to see consistent growth in the core, non-COVID business. For this year, you’ve got double-digit revenue growth from the non-COVID business at Sonic, which is back to how the company used to be. And that nice, steady growth is why it commanded a premium multiple.”

Note: This interview took place on Thursday 17 August.

Sonic Healthcare full-year key results

• EBITDA +11% to $1.7 billion
• Total revenue -13% to $8.17 billion ($485 million was COVID revenue, down from $2.4 billion in FY22)
• EPS +19% versus FY2019 (pre-pandemic)
• Net profit -53% to $685 million
• Final dividend of 62c/share, fully franked

Key company data for SHL

In one sentence, what was the key takeaway from this result?

The main talking point from the result was that guidance for FY24 of between $1.7 billion and $1.8 billion is below where the market expected, which was looking for about $1.85 billion.

It’s not generally a “lumpy” business in terms of earnings, but they made a lot of money from COVID testing in FY21 and FY22, and not just in Australia but also in the US and Germany. That’s really dropped off in FY23, which is why earnings have gone backwards this year. And it’s very hard for the market to work out where those core earnings are going to settle.

The balance sheet’s now very strong – they made a lot of money from it and didn’t make any bad acquisitions, so they’ve got a good opportunity now on the other side of COVID.

SHL’s share price opened about 5% below Wednesday’s closing price. Is this an overreaction, under-reaction or appropriate, in your view?

On the back of it opening down 5%, that’s why I regard it as a BUY. And that reaction is rational because there’ll be earnings downgrades of between 5% and 10% from here.

For me now, that rebased cash position makes it interesting from the buy side.

Were there any major surprises in this result that you think investors should be aware of?

The two key surprises were the speed of the drop-off of COVID revenues and the size of the margin they were getting on that.

Would you buy, hold or sell SHL on the back of these results?

Rating: BUY

I’m on the buy side. I think we’ll see earnings downgrades in the order of 5% to 10% in the next year. But I think we’re now at a base where the company can start growing again. 

I think it’s a high-quality business with nice, steady growth that’s not correlated to the overall economy.

What’s your outlook on SHL and its sector over the year ahead? Are there any risks that investors should be aware of?

I think there’s a bit of upside there from the money it’s spending on generative AI, so it could be well-positioned to take advantage, but that’s not being valued by the market.

There were no risks flagged by management but the risk with any of these pathology businesses is government budgets, with government usually a major player.

As government budgets come under pressure, there’s always the risk that the provider – such as Sonic – gets a smaller cut. That’s a risk with most healthcare providers.

There’s also interest expense, which was flagged as being 25% higher in FY24. That’s for two reasons – they’ve made some acquisitions, and also higher interest rates. And I think that’s a theme right across this earnings season: the market’s been surprised at how high interest expense is going to be this year.

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX right now? Are you excited or are you cautious about the market in general?

Rating: 4

Relative to the yield you’re getting on bonds, and the earnings growth you’ll get for the next year, the ex-resources and ex-banks PE multiple of the market is around 19 or 20. And that’s not cheap. I’m not seeing a heap of value at the moment.

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