Pathology business and serial acquirer, Sonic Healthcare Limited (ASX: SHL), announced a further German acquisition to the market this morning.
The purchase of specialist pathology service Medical Laboratory Bremen ('MLB') will cost approximately €63 million and is expected to grow Sonic's earnings per share by approximately 2% in the first year. MLB appears a nicely profitable business that is expected to remain attractive for many years in the future, owing to its specialist nature. The purchase will be funded from Sonic's existing cash reserves.
With approximately 412 million shares on issue, a 2% increase in earnings per share (to just over 106 cents per share) looks to equate to roughly an A$8.5 million increase in profit. That represents a purchase price for MLB of around 10x profit, using today's exchange rate.
Is Sonic a buy?
Sonic is currently priced at around 19 times last year's profits, just above the ASX average. Its businesses – pathology services – are reasonably defensive, although subject to potential changes to regulation and government reimbursement as we have seen in recent times.
The company has good diversification, with operations in most developed economies:
Global diversification both minimises the impact of regulatory changes in any one country, as well as mitigating some of the impact of currency movements, since Sonic uses debt in local currency wherever possible. 59% of Sonic's revenues were earned overseas in 2016.
Although Sonic uses debt to acquire businesses, it retains a fairly strong balance sheet with $2.1 billion in debt, and annual interest expense of about $60 million. Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA) of $831 million covers the interest expense 14 times over, meaning the company is quite capable of covering its debt.
I like Sonic, and the company appears to have been prudently run in the three years I've been covering its announcements. The downside is that it is a mature business, and most of the earnings growth comes through acquisitions. The high price of some of Sonic's acquisitions – like the 10x profit for MLB – suggests that it is difficult to find attractive businesses on the cheap.
Sonic would suit long-term shareholders looking for reliable dividends, a defensive business, modest growth via acquisition and possibly share buybacks down the track.
