INSIGHTS

WEEKLY STOCK COMMENT: SONIC HEALTHCARE

Roy Davidson, 11 May 2017

Stock Comment - Sonic Healthcare SHL

Sonic Healthcare (SHL) is a global medical diagnostics company, providing pathology and radiology services to the medical community. Based in Sydney, SHL operates in Australia, New Zealand, the US, Germany, the UK, Ireland, Belgium and Switzerland, and has over 23,000 employees worldwide.

Overview

Sonic Healthcare (SHL) is the largest pathology provider in Australia, Germany, Switzerland, and the UK/Ireland, the second largest in New Zealand and Belgium, and the third largest in the United States. In addition, SHL is second in the Australian radiology market, and is the largest operator of medical centres and the largest provider of occupational health services. Pathology is the key service, accounting for over 80% of revenues and earnings. Radiology provides over 10% of earnings.

SHL will benefit from several industry drivers. These include an ageing population, increasing healthcare spend, the focus on preventive medicine and improved technology which expands the range of tests that can be offered. Genetic sequencing also provides a new opportunity, and SHL has recently expanded its capability in this area. However, SHL has a track record of growing the business through executing successful acquisitions (making over 100 acquisitions in its history) and acquisitions remain integral to its business and future growth.

SHL is reliant on Government funding to a large extent and changes to funding regimes and regulations constantly present risks. These are often no more than an announcement away. These risks have been highlighted recently, with the Australian Government proposing to effectively cut funding to pathology operators. These cuts could have decreased earnings by 3-4%, however, the cuts have now been largely mitigated.

SHL provides a relatively defensive exposure to the attractive healthcare sector. It has steady revenues and earnings due to its entrenched market position in a large number of countries and its market leading business operations. We expect SHL to provide earnings and dividend growth as it continues its strategy to consolidate a number of fragmented overseas markets and benefits from the positive long-term drivers. The nature of the sector means SHL is continually exposed to regulatory and funding risks, which have the potential to negatively impact earnings. However, its geographic diversification helps to mitigate this risk as compared to peers. This was evident in the latest result where Australia was weak, but the slack was picked up by strong results in the US and Europe.

Risks to SHL include; 1) regulatory risk, 2) competition, and 3) technological change.