Why we think Sonic Healthcare is a buy


Sonic Healthcare (ASX code: SHL) is one of the world’s leading medical diagnostics operators. If you’ve been scanned for an injury, tested for an illness, or have been PCR tested for COVID-19 in the past year, chances are Sonic has facilitated that in some way. .

The company provides a range of radiology and pathology services to hospitals, medical practitioners and community medical service providers. It operates in Australia and around the world, serving some 130 million patients and employing 38,000 people.

Sonic’s business can be considered in three segments: laboratory, radiology and medical centers (revenue share by business segment and by geography is shown in the charts below).

The bulk of Sonic’s revenue comes from its laboratory services business which provides the study and diagnosis of disease through the examination of organs, tissues, cells and bodily fluids. Sonic is the largest private pathology operator in Australia, Germany, Switzerland and the United Kingdom, the second largest in Belgium and New Zealand and the third largest in the United States of America.

In addition, Sonic’s diagnostic imaging business provides X-ray, ultrasound, CT and MRI scans and other imaging technologies to customers in Australia, and is number two in this market.

Finally, its medical centers and occupational health services offer primary care clinics and administrative services to general practitioners. Sonic is the leading provider of such services in Australia.

Revenues have increased significantly lately due to the increased need for COVID-19 PCR tests. While these revenues are expected to moderate, the potential for continued testing requirements as the pandemic evolves remains.

Beyond COVID-related effects, the company’s longer-term outlook is supported by demographic shifts such as an aging population and the growing prevalence of chronic diseases.

This should lead to an increase in the underlying demand for health services. Sonic is well positioned to take advantage of this long-term structural theme. The company’s strong market position today has been achieved through a combination of organic growth and a series of global acquisitions.

This is the strategy moving forward and there are multiple opportunities in existing markets such as the US or for the company to consider acquisitions in other countries.

Return

Over the past 10 years, Sonic has achieved an impressive annual return of 17.6%, on reinvestment of dividends, which compares to the ASX200 return of 11.5%. This return roughly consists of returns to capital (increase in share price) and dividends to shareholders in equal parts.

The company’s current dividend yield is just under 3% and has been growing at more than 4% annually. The dividend is franked at 65%, which represents the fact that Sonic makes a large part of its profits abroad. Sonic only pays out 33% of its earnings as a dividend, the rest has been earmarked for future acquisitions to support its long-term growth ambitions.

ESG considerations

Sonic scores well in our environmental, social and governance assessments, particularly in categories such as corporate governance, shareholder rights and social responsibility. The board is well-diversified from a gender perspective, with 33% female representation.

From an environmental perspective, Sonic is committed to actively reducing its carbon footprint and planning a path to net-zero emissions, a key goal given its reliance on its courier network for pathology.

Recommendation – BUY

Sonic Healthcare is considered a BUY based on our analysis. From a valuation perspective, the stock looks cheap, however, earnings boosted by the COVID-19 pandemic are expected to normalize in 2022. The company is a high-quality company and holds leading market positions. in all the sectors in which it competes.

This allows the company to generate high margins by taking advantage of the synergies obtained from large-scale operations. These characteristics are confirmed by the fact that the company’s profit in 2023 is expected to be 65% higher on revenue growth of only 20% compared to its 2019 results (pre-COVID).

Its geographic diversity is another key advantage, particularly important given the risk imposed by potentially reduced public funding for health care. Sonic’s low level of capital intensity allows it to generate strong cash flow and maintain a reasonably leveraged balance sheet.

These positive characteristics are reflected in our rating for the stock, which performs well both in terms of quality and growth. Based on that, Sonic is currently our favorite healthcare stock.

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