Sonic Healthcare making synergistic acquisitions as it transitions from the high volume Covid-19 testing environment

About Sonic Healthcare Limited

Sonic Healthcare Limited (Sonic, the Group, ASX: SHL) is one of the world’s largest medical diagnostics companies that provides laboratory and radiology services to doctors, hospitals, and their patients. Sonic was listed on the ASX in 1987 and today employs 1,600 pathologists and radiologists, and 15,500 medical scientists, radiographers, technicians and nurses, making it one of the world’s leading healthcare providers.

Transitioning from the high volume Covid-19 testing environment

Sonic has completed several synergistic acquisitions since July 2023 as it transitions from the high volume Covid-19 testing environment experienced in financial years 2020, 2021 and 2022. The 2023 financial year recorded an 80 percent reduction in COVID-related revenue. Recent strategic acquisitions include SYNLAB Suisse, Dr. Risch (Switzerland), PathologyWatch (USA), and the Hertfordshire & West Essex NHS contract (UK). These investments are anticipated to add A$500 million in new annual revenue and drive consistent earnings growth as synergies and efficiencies are realised from the 2025 financial year. Sonic is actively considering additional consolidation opportunities of the fragmented laboratory and radiology markets through other synergistic acquisitions.

Apart from acquisitions, Sonic has invested $350 million in diagnostic technologies with material future earnings potential that includes the application of Artificial Intelligence (AI) in pathology and radiology to drive efficiency, quality, and capacity. Sonic employs more than 1,000 expert anatomical pathologists who can provide enhanced patient diagnostic outcomes driven by digital pathology and AI.

Sonic has confirmed it is on track to achieve FY24 EBITDA guidance towards the lower of the guidance range, implying a forecast of around $1.6 billion on revenues of approximately $8.9 billion. Organic revenue growth of 6.2 percent for the four months to April highlights the Group’s strong market position in diagnostic services which drives top-line growth.

Earnings resilience provides long-term dividend stability

Sonic operates in the defensive healthcare sector where revenues are supported by an ageing population that is living longer and requires pathology and diagnostic imaging services to help medical practitioners diagnose and monitor illnesses. In FY2023, 17.4 million Australians (67 percent) accessed 196 million Medicare-subsidised pathology and diagnostic services. Ninety-one percent of these services were provided in non-hospital settings.

Significantly, Sonic operates in countries where the standards of medical care services are equally as high as in Australia. These countries include Germany, the UK, Switzerland and the US. Moreover, demand for healthcare services is less impacted by high interest rates and other impacts of the economic cycle and so the earnings of healthcare providers like Sonic remain resilient during periods of slow economic growth.

This earnings resilience is reflected in Sonic’s 31-year history of increased (or at least maintained) dividends every year without exception since 1994. Sonic shares are also one of the lowest-Beta stocks on the ASX. Sonic’s Beta is 0.5, as measured monthly over the past 5 years. Beta is a statistical measure of the price volatility a stock, compared to the volatility of the broader market. Market Beta is 1, which means that Sonic’s Beta of 0.5 tells investors that Sonic’s share price will move in either direction by approximately half of the broader market. In other words, Sonic’s share price volatility is half that of the overall share market.

Sonic’s strategic investments executed since July 2023 should enhance future earnings and shareholder returns as synergies and efficiencies are realised. Backed by a steady 3.3 percent dividend yield and low share price volatility, Sonic’s FY25 guidance statement to be released with the FY24 results on August 23, should point to higher long-term earnings growth.