Sonic Healthcare: Interim result 2013
Recommendation
Sonic Healthcare managed to increase profit by 9% to $155m in the six months to 31 December, from revenue that increased 6% to $1,733m, but the share price fell 9% on the news. Such is the consequence of missing guidance. Management also ratcheted down full-year earnings growth expectations to the lower end of ‘5% to 10%'. A slightly higher 25 cent per share dividend was declared (45% franked, ex date 1 February) from earnings per share of 39.5 cents.
The weaker than expected performance was lead by the key US market, which makes up 21% of revenue. Revenue there fell 2% to $367m due to the less buoyant economic conditions – resulting in forgone or delayed pathology tests. Superstorm Sandy also didn't help, wiping around 5% off the region’s earnings on its own. Management expect US results to stabilise as it ekes out costs savings from the business and ‘Obamacare’ helps widen the pool of those with medical coverage, albeit within a tighter fee environment.
German promise
Sonic’s German operations showed more promise, as expanded market share helped it increase revenue 8% to $265m. As with other developed markets, the Government is keen to reduce the growth in pathology spending by outlining a new stricter funding regime.
At home, Sonic is also facing tougher regulations. Revenue grew 5% to $520m, and it remains the largest part of the business, generating 31% of revenue. Sonic is currently integrating the recently acquired Healthscope business and expects margins to improve.
Operations in Switzerland, the UK and Belgium performed well during the half, but make up less than 10% of Sonic’s business.
Sonic Imaging (its radiology business) and IPN Medical Centres (its network of private general medical practices) increased revenue 6% and 15% respectively, and together make up 22% of Sonic’s business.
Scale benefits
Running pathology clinics remains a profitable, cyclically immune business, but the general theme is clear: governments need to reduce health spending, making easy revenue growth more difficult to come by. Expansion by acquisition remains an attractive option due to the scale benefits of this business – but we remain mindful of Sonic’s debt load and were pleased to see an increase in interest cover this period to just shy of 8 times.
All up, Sonic's share price is down slightly since 19 Sep 12 (Hold – $13.16), and it remains a comfortable HOLD. Expect a more detailed review after reporting season.
Note: The model Growth portfolio owns shares in Sonic Healthcare.