Sonic Healthcare: FY21 in line - Pedal to the floor
About the author:
- Author name:
- By Dr Derek Jellinek
- Job title:
- Senior Analyst
- Date posted:
- 24 August 2021, 9:00 AM
- Sectors Covered:
- FY21 underlying results were in line with consensus expectations, albeit above our estimates, with COVID testing driving upside across all laboratory businesses (organic, cc revenue growth +37%).
- The base testing business (ex-COVID) continues to demonstrate resilience, up on pcp and FY19 (pre-COVID), while Imaging posted double digit growth and market share gains, offsetting modest sales softness in pandemic impacted Clinical Services.
- While no FY22 guidance was provided, the recent uptick in COVID testing on the Delta variant and emerging related activities (eg travel passports; vaccinations), along with a solid base business, strong B/S and ample liquidity for tuck-in acquisitions, underpins a strong outlook.
- We have adjusted FY22-23 estimates and rolled forward valuation multiples, with our target price increasing to (login to view). Add.
FY21 results were roughly in line with consensus expectations (NPAT A$1,315m, +149%, +161% in cc; Consensus A$1,339m) on revenues of A$8,754m (+28%; +34% in cc; Consensus A$8,779m).
Underlying earnings were solid (EBITDA A$2,560m; +81%, +89% in cc), with margins expanding 8.53pp to 29.2%.
OCF was up 50% to A$2,043m, with strong cash conversion (97%) supporting an 8% increase in the final dividend (A$0.55; 65% franked).
COVID testing (c30m PCR tests) underpinned organic laboratory revenue growth (37% in cc; 88% of total revenue), with particular strength seen in Northern Hemisphere (US +34%; EU +46%). We estimate COVID testing represents 27% of total revenue and 56% of underlying earnings.
The base business testing (ex-COVID) showed continued resilience, up 6% on pcp (+4% vs FY19), while Imaging (7% of total revenue) posted double-digit revenue growth on investments in greenfields and new equipment, offsetting continued softness in Clinical Services (5% of total revenue) on pandemic impacts.
While no quantitative FY22 guidance was provided, with management citing "COVID related unpredictability", and we assume peak COVID testing may be behind us, we believe the outlook remains strong given:
i) COVID testing is ticking higher on Delta variant spread, despite 1H/2H slowing (-33%; 1H/2H 18m/12m), with the virus likely to be endemic and part of the lab testing menu going forward just like other respiratory viruses;
ii) emerging COVID related opportunities (eg track/trace; travel passports; vaccinations; rapid antigen testing; whole viral genome sequencing);
iii) fairly consistent, resilient and more efficient base business, benefitting from geographical diversity and intact core healthcare growth drivers; and iv) strong B/S (gearing 12.5%, 20+ year low), with cA$1.5bn headroom opening the door to acquisitions, contracts and JVs.
Forecast and valuation update
Adjusted COVID testing assumptions (-90% from FY21 levels through FY24), but with improved margin estimates, results in FY22-23 EBITDA up nearly 37%.
FY22-23 earnings changes combined with rolling forward valuation multiples, sees our blended DCF and SOTP valuation-based target increase to (login to view).
While COVID uncertainty is likely to continue to cloud the near and medium term, we believe SHL is in a strong position for continued organic growth, against a fairly benign near-term regulatory backdrop and ample headroom (A$1.5bn) for additional growth opportunities.
AGM 18 Nov-21; Final dividend payment 22 Sept-21 (record data 8 Sept-21).
Lower COVID testing volumes, changes to base business testing, margin compression, changes in the degree of competition, slower acquisition integration and synergy capture, regulatory intervention and market share loss.
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