Sonic Healthcare: Strong FY22 start; COVID testing leverage evident

About the author:

Dr Derek Jellinek
Author name:
By Dr Derek Jellinek
Job title:
Senior Analyst
Date posted:
22 November 2021, 9:00 AM
Sectors Covered:

  • SHL provided a solid trading update for the first four months of FY22.
  • Revenue increased 5% on pcp, while underlying earnings jumped 16% as margins expanded 310bp to 32.1%, an all-time high.
  • The strong result was underpinned by continued growth in COVID-19 testing revenue (+9%), as well as ongoing resilience in the base business (+6%).
  • While the pandemic continues to cause volatility, as reflective of no FY22 guidance, and COVID-19 testing is slowing, it is unlikely to disappear entirely, and we continue to see risk skewed to the upside, especially as the northern hemisphere enters winter.
  • We have adjusted our FY22-24 estimates, with our target price increasing to (login to view). Add.


Concurrent with its AGM, SHL provided a trading update for the first four months of FY22 ending 31-Oct-21.

Compared to the pcp, revenue and underlying earnings increased 5% and 16%, respectively, with operating margins expanding 310bp to an all-time high of 32.1%.


The company continues to support governments, healthcare authorities and communities with COVID-19 pandemic control initiatives in its seven countries of operation. 

The strong results were underpinned by ongoing COVID-19 PCR testing, with the company performing c36m tests to date, with Germany (c25% of total revenue) at record levels and associated revenue up 9%.

We estimate c6m COVID-19 PCR tests performed through 31-Oct, annualising to c18m (-40% vs FY21; -25% 2H21 vs 9m estimated 1H22).

Notably, it appears greater scale-efficiencies around COVID-19 testing across the company’s high fixed-cost base is accelerating profitability, as we estimate operating margins more than double the underlying pathology business.

Management expects “significant ongoing COVID-19 testing revenue into the foreseeable future”.

The company is also providing serology testing and, in some markets, COVID-19 whole genome sequencing to aid identification of variants.

In Australia, the company has provided >1m COVID-19 vaccinations through special purpose high volume hubs and its network of more than 200 medical centres.

SHL continues to provide essential non COVID-19 healthcare services despite the operational challenges posed by the pandemic, with base business revenue growing 6% on pcp and 4% versus the same period in FY20.

The underlying growth drivers for healthcare services remain unchanged.

Forecast and valuation update

We have adjusted COVID-19 testing estimates and margin assumptions, resulting in FY22-24 underlying earning increasing up to 16.9%.

Our blended DCF and SOTP valuation-based target increases to (login to view).

Investment view

While COVID-19 uncertainty is likely to continue to cloud the near and medium term, we believe SHL remains in a strong position for continued organic growth and continued (albeit slowing) COVID-19 testing, against a fairly benign regulatory backdrop and with ample headroom (A$1.5bn) for additional growth opportunities.

Price catalysts

Trading updates; 1HFY22 results 21 Feb-22.


Lower COVID-19 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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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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