Sonic Healthcare: Covid gain turns to valuation pain

Sonic Healthcare (ASX: SHL) is now trying to price-in what normalised covid testing revenues might look like, down -5% after its half-year FY22 results.

At face value, the pathology business achieved yet another record financial result thanks to a resilient base business, enhanced by covid testing revenues.

Financials at a glance: 

• Revenue of $4.76bn, up 7% 

• Net profit of $828m, up 22%

• Interim dividend of 40 cents, up 11% 

• Plans for a $500m on-market buy-back

The profit result was in-line with Bloomberg estimates of $828m and ahead of Bell Potter forecasts of $808.4m. 

Covid winner but vaccine loser?

Sonic shares have an uncanny correlation with the number of daily PCR tests in Australia.

Both Sonic shares and PCR testing numbers broadly topped out in late December, and on a sharp decline ever since.

Source: covid19data.com.au/testing

What's interesting is that Sonic's Australian pathology is the Group's largest division, contributing $1.35bn or 28% of overall revenues in the first-half, and up 38.6% compared to last year.

The base business for Australian pathology grew just 1%, while covid testing revenues surged 215%.

According to covid-19 data, daily PCR tests averaged 186,679 between 20 September and 31 December last year.

Whereas average testing figures year-to-date, to 21 February sit at 164,367 (-12% compared to above period).

Average tests in February are just 96,362 (-48% compared to Sep-Dec average).

Sonic has already experienced a pullback in covid testing revenues in regions including US, Germany, the UK and Belgium.

Capital management

While Sonic's valuation might be on the decline, covid testing revenues have helped push the company's gearing to record low levels.

Sonic intends to increase its net debt closer to long-term averages through a combination of synergistic acquisitions and a share buy-back of up to $500m over the next 12 months.

Outlook

Sonic was unable to provide a full year guidance as "covid revenues remain unpredictable".

Encouragingly, the company recorded revenues of $818m in January, up 18% compared to the prior period.

The company said that covid testing has remained high in Europe, but slowing down in Australia and the US.