Sonic Healthcare: COVID-19 Patients running scared
About the author:
- Author name:
- By Derek Jellinek
- Job title:
- Senior Analyst
- Date posted:
- 24 April 2020, 4:30 PM
- Sectors Covered:
- Lab testing volumes appear to be rapidly declining as elective procedures are curtailed and patients put off even routine doctor's visits on the fear of COVID-19.
- Lower utilisation rates have seen multiple industry players retract guidance and while increased COVID-19 testing provides a partial offset to lost volumes, a high fixed cost base will keep pressure on profitability.
- While SHL is at the forefront of the fight against COVID-19, the crisis remains 'fluid and unpredictable', with customer behaviours unlikely to change overnight as countries look to slowly relax restrictions and concerns mount on resurgences.
- We have made material changes to underlying FY20-22 EBITDA estimates, with our price target decreasing (login to view target price).
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COVID-19 a positive...everything else a headwind
SHL stands at the forefront of the fight against COVID-19, with labs across three main geographies (ie Australia, EU and US) providing essential clinical testing for the virus, with its focus on reliable supply of equipment/consumables to ensure adequate capacity. However, increasing costs of testing components (eg specimen collection swabs, reagents, and PPE) combined with decreased revenues due to lower routine lab services as a result of social distancing and a decrease in routine physician visits and surgeries are clear headwinds, with the earnings impact amplified by a high fixed cost base (c70%).
Channel checks see significant impacts
The unpresented level of uncertainty and impact around COVID-19 has seen clinical labs and diagnostic firms following in SHL’s footsteps and withdraw guidance, with some highlighting reduced overall testing volumes. Quest Diagnostics (DGX) previously reported more than a 40% decline in volumes in the last two weeks of March, but in its 1QCY20 result the other day, said that this decline has accelerated up to 60% this month, with the impact seen across the country, not just in infection hotspots (eg NYC, NJ, Cal). Despite signs of stablisation, volumes have not turned around. More concerning, while COVID-19 testing is expected to remain high and significant potential seen in the just- started serology testing, management guided 2QCY20 to be down 50-60% (ex-COVID- 19 testing). Similarly, the Royal College of Pathologists of Australasia has recently noted a 40% drop in routine pathology testing, translating into 60k Australians not getting tested.
Behavioural change doesn’t happen overnight
The decline in testing is telling, especially as there are numerous measures in place to provide safe access to interventions during COVID-19 restrictions. So while there is obvious pent up demand, we do not expect an immediate change of patient behaviour, with a number of social distancing measures to remain in place as countries look to gradually reopen their economies and concerns only increase about potential resurgences.
Material near-term earnings changes; ADD retained
Our FY20-22 estimates factor in a 40% decline in revenues across the main geographies (Aus, US, EU) between CY2Q20 and CY3Q20, with negligible adjustments to the cost base. Our DCF/SOTP-based price target decreases.
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