Sonic Healthcare (SHL). This morning global pathology company SHL reported their first half of 2023 profit results, which were much stronger than usual pessimistic sell-side expectations. These were an eagerly awaited set of results and the first to show a slowing down of PCR testing, which has offered rivers of gold for SHL.

Key Points:

  • Profits Down:   Interim profits were down 54% to $382 million as high-margin Covid testing (in Europe and Australia, PCR testing had an 80% profit margin billed to the state) revenue declined from $1.2 billion to $400M, in line with forecasts. What was pleasing was the base pathology testing business trading significantly ahead of pre-Covid numbers. All parts of the business performed well, especially Germany, USA,  Australia, radiology and the UK. Profit and earnings per share were 50% above pre-Covid numbers, as SHL used the windfall gains to pay off debt, buy back stock and buy new lab businesses in the USA, all of which have improved the quality of the SHL business.
  • Dividend: A modest increase of +5% to $0.42 per share in line with SHL’s progressive dividend policy (see below)  and a low payout ratio of 50%. Franking jumps at 100% due to higher Australian profits and a low payout ratio.
  • Balance Sheet solid: gearing at a mere 10.5% with interest cover 11x, over the half, SHL bought back $425 million in stock on market with $75M to go before June.
  • Why is the stock up? The market has consistently underestimated SHL’s ability to grow its organic pathology testing business (see below). SHL will benefit in 2023 from a catch-up in pathology testing which was seen in the January 2023 numbers.
  • Outlook: There is no explicit guidance, but revenues in January were solid +10% on January 2020.

Sonic Healthcare is held in several of the HNW portfolios and exposes us to rising demand for medical testing, exacerbated by new medical technologies, an aging population and a desire by doctors to cover themselves against malpractice claims by increasing the number of tests being ordered. SHL is one of the largest global patient testing companies with a significant market share in Australia, Germany, the UK and the USA and will benefit from a falling AUD. Unlike drug companies or device companies such as Cochlear, SHL has an industrial process of blood and tissue sample testing that benefits from economies of scale and not the hundreds of millions of dollars invested in R&D to develop the next wonder drug device.

In the medium term, SHL will benefit from an older and sicker population (probably exacerbated by CV-19) and doctors scheduling more tests to avoid malpractice suits, particularly in the USA, where SHL is now the third largest pathology company.

 SHL finished up +14.3% to $33.20, the top-performing stock in the ASX 200 today