Shareholders of Sonic Healthcare Limited (ASX: SHL) were given bad news this morning after the Australia-based medical diagnostics group said it lost an anticipated laboratory contract in Canada.
So What: Sonic Healthcare said in October last year that it had been selected by Alberta Health Services as the preferred provider of laboratory services in the Edmonton area, together with parts of central and northern Alberta.
Describing it as a "very significant, strategic expansion opportunity", Sonic anticipated the potential contract would allow it to generate annual revenue of more than $200 million Canadian dollars ($207.5 million). The contract would have spanned for an estimated 15 years, with an option for Alberta Health Services to extend the agreement beyond that time.
In today's announcement however, Sonic advised that the new provincial government of Alberta has made the decision not to proceed with the contract, with the Minister of Health announcing a comprehensive review of options for the future provision of laboratory services in the region. It will not increase the proportion of health services delivered by private companies unless the benefit to the public can be demonstrated accordingly.
Sonic Healthcare said that it would seek to participate in this review and explore options for future involvement.
Now What: This is certainly a setback for Sonic Healthcare, although it is important for investors to note that no contributions from the proposed contract were included in Sonic's recent earnings guidance.
On 20 July 2015, the group said it expects to report earnings before interest, tax, depreciation and amortisation (EBITDA) of $730 million for the 2015 financial year (FY15) – a 3% to 4% decrease on prior guidance as a result of issues impacting the Australian Pathology market. EBITDA is then expected to rise between 16% and 20% in FY16 to between $850 million and $875 million.
Although the contributions for Alberta were not included in the group's forecasts, the market is still forward-looking and investors are right to be disappointed. The stock fell 1.1% to $20.26 and is down nearly 15% over the last month, compared to a 4.7% decline for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) over that time.
For investors wanting to gain exposure to Australia's booming healthcare sector, Sonic Healthcare could be a reasonable buy at today's price – especially if it can make up for its lost Canadian opportunity with other international expansion – a task which it seems very capable of.
