Global diagnostic imaging business Sonic Healthcare Limited (ASX: SHL) reported its interim results to the market this morning.
Shareholders had some concerns after the recent loss of the Canadian contract and potential changes to Australia's rebate system (which could still impact in future periods), however today's results were decent. Here's what you need to know:
- Constant-currency revenue rose 12.6% to $2,269m
- Net Profit After Tax (NPAT) attributable to shareholders shrank 0.2% on a constant currency basis, rising 8% to $187m thanks to positive currency effects
- Outperformance in USA and UK joint venture
- On track to meet full year guidance of Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) of $815m-$840m
- However, Sonic expects full-year EBITDA could come in higher at $870m-$900m, assuming current exchange rates continue
- Cash of $256m, total debt of $2.7bn, much of which is denominated and paid in foreign currency
- Including remaining debt headroom, Sonic has A$468m of available funding
So What?
Sonic continues to enjoy solid organic growth, although as in previous years the majority of earnings growth is provided through acquisition. Sonic's Laboratory division grew revenues by 26%, including organic growth of ~7.5% on a constant-currency basis. Organic revenue growth was 4% in Australia, 1.9% in the US, 75% in the UK, 6.1% in Switzerland, 4.4% in Germany, and 2.6% in Belgium, all in constant-currency terms.
Imaging revenue grew just 0.8% (constant-currency) due to an unexpected fall in total market growth, which Sonic attributed to negative government and media publicity.
Sonic has previously indicated that the Australian government's MYEFO changes to Medicare fee cuts would result in an estimated 3.5% reduction in Australian laboratory revenues, and a 2.7% reduction in imaging revenues. With no mitigating actions, this would result in a 5-6% decline in EBITDA for the 2017 financial year.
Now What?
Sonic has gearing of 37% and remains within the limits of its banking covenants with interest cover of 10.8 times (minimum 3.25 times) and debt cover of 2.7 times (maximum 3.5 times). However, with only $468m of available funding and uncertainty regarding Australian regulatory changes I don't believe investors should expect significant acquisition-driven growth in the near future.
Thankfully Sonic continues to enjoy decent organic growth in each of its markets, and even grew faster than the market average in Australia, suggesting it is taking market share from competitors. As I am not expecting anything more than organic growth from Sonic in the near future, I believe Sonic shares are too pricey to represent a great buy today – especially with regulatory impacts looming.
However, the company continues to be a solid performer and I believe existing shareholders should continue to hold their shares for the long term.
