Sonic Healthcare: Result 2012

Sonic Healthcare’s full-year result met expectations, although the strong Australian dollar restrained profit. Revenues rose 8% to $3.3bn, earnings before interest, tax, depreciation and amortisation (EBITDA) rose 10% to $624m, and net profit rose 7% to $316m. An unchanged final dividend of 35 cents was declared, franked to 45% (ex date not yet known).

The Australian and German pathology businesses performed well, with revenue growth of 9% and 7% respectively. While the German pathology market looks to be moving to a capped outlays system from 1 October (similar to that which operates in Australia), Sonic still expects to achieve growth in that market.

In Australia, pathology outlays have been running at 7%, above the 5% cap the industry agreed with the government last year—see 12 Apr 11 (Hold – $12.63). While the agreement allows for upward adjustments, the government won’t be keen to see outlays exceeding the agreed limit so quickly. Regardless, Sonic is taking market share locally.

By contrast, Sonic’s US business has slowed significantly, similarly to what happened in Australia in 2010. Management attributed this to weak employment; with fewer people in work (which corresponds to fewer people having health insurance), they’re visiting doctors less often. A small fee cut won’t help in 2013 but, from 2014, up to 30 million more Americans will have health insurance (under the ‘Obamacare’ reforms).

In 2013, management is forecasting EBITDA growth of 5%-10%. But with a higher tax rate expected, Sonic may well struggle to achieve much in the way of earnings per share growth. There may be upside if the company is allowed to acquire the Healthscope businesses—see 16 May 12 (Hold – $12.81)—but that depends on the ACCC.

Sonic’s share price is almost unchanged since 16 May 12. On a prospective 2013 PER of 15, the stock remains a HOLD.

The model Growth portfolio owns shares in Sonic Healthcare.