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Sonic Healthcare: Very strong FY21 result due to COVID but returning to “normal” could be a negative for Sonic

Timothy Anderson

Timothy Anderson is a contributor with the Australian Stock Report and is currently in his final year of studying a Bachelor of Applied Economics and a Bachelor of International Relations and Politics at the University of Canberra. Tim has a genuine passion for economics, specifically in macroeconomic analysis including how certain macroeconomic policies and indicators affect financial markets and the economy, as well as how these factors affect personal investment strategies. Tim currently holds RG146 Tier 1 Generic Knowledge qualifications.

Sonic Healthcare (ASX: SHL) is a leading provider of medical diagnostic services (pathology and radiology). It has a dominant position in the Australian market and has established a large presence in the United States and German markets and, to a lesser extent, the United Kingdom, Switzerland, Belgium, and New Zealand markets. Sonic Healthcare has a market capitalization of A$19.9 billion.


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What are the key features of the FY21 result for Sonic Healthcare?

Sonic Healthcare reported FY21 net profit of A$1.3 billion (up 149%) and gross operating cash flow of A$2.5 billion (up 56%) Sonic Healthcare will pay a final dividend at A0.55 cents per share, compared to A0.51 cents for FY20. FY21 final dividend franked to 65% (previously 30%). Total dividends for the year up 7% on the prior year.

This strong growth in net profit reflects strong growth in revenue which was up 28% in FY21. This primary reason for this growth is the new business of COVID testing, with approximately 30 million COVID-19 PCR tests performed to date in Sonic laboratories globally. The impact of COVID testing on Sonic’s business is illustrated by the fact that FY21 global base business revenue excluding COVID testing was up only 6% versus FY20 and 4% versus FY19 (pre-pandemic).


What is the outlook for Sonic Healthcare?

Sonic Healthcare’s management did not provide FY21 earnings guidance at this point due to COVID-19 uncertainties. However, Sonic noted that COVID-19 PCR test volumes were lower in H2 versus H1 but now increasing with the spread of the Delta variant. The next market update may be provided at Sonic Healthcare’s AGM in November 2021.

The short term outlook for Sonic depends on the sustainability of COVID testing. On the one hand, at some point, the COVID testing volumes may ease and if so Sonic’s earnings will moderate. This is the market’s current expectations. On the other hand, high COVID testing volumes may continue indefinitely notwithstanding populations becoming vaccinated.

The long term outlook for Sonic Healthcare is positive. Sonic Healthcare business is diversified amongst several markets with future growth opportunities expected through acquisitions, joint ventures and contacts, which should increase revenue in the coming years.

In this respect, Sonic noted that its liquidity position is very strong and gearing is at record low levels. Consequently, Sonic is actively considering further acquisition opportunities, as well as bidding for a number of outsourcing contracts. This should add to long term growth.


What is the market reaction to the FY21 result?

The market reaction to Sonic’s FY21 report is slightly negative. Sonic’s share price is down around 3% and is currently trading at A$41.60. Sonic is trading at a forward P/E ratio in the high-twenties (reflecting expectations that earnings will fall in FY22) and a dividend yield of around 2.5% (65% franked).



This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purposes only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceedings. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.


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