Why Sonic Healthcare (ASX: SHL) is a Stock to Buy

 This article was originally published at:  MF & Co. Asset Management.

Sonic Healthcare Limited (ASX SHL) is Australasia and Europe’s largest and the world’s third-largest medical laboratory provider. During the last financial year, Sonic Healthcare stock has been rewarded a government program and successfully acquired several professional laboratories, which has significantly driven revenue and increased the company’s share price.

Compared to the previous year, Sonic Healthcare shares’ revenue and share price rose 8% and 10% respectively, showing that Sonic Healthcare continues to experience strong growth.

About Sonic Healthcare Stock

Sonic Healthcare Limited, established in 1987, is a parent company of a wide range of medical healthcare practices and laboratories. The company provides services and infrastructure in eight countries: Australia, United States, New Zealand, the UK, Germany, Switzerland, Belgium and Ireland.

It is the largest provider of pathology and diagnostic imaging services in Australia, and also a leader in pathology and diagnostic imaging throughout the world.

Sonic Healthcare Becomes a Partner of an Innovative Government Program

During the second half of 2017, Sonic Healthcare was selected as the laboratory partner for the Australian Government’s National Bowel Cancer Screening Program, which will contribute around A$30 million of revenue per year.

This program provides a free test kit that can be completed at home to screen for bowel cancer, with the potential of saving up to 500 lives annually, and significantly reducing the burden of bowel cancer on Australians and their families.

Sonic Healthcare’s unique products and services attracted the attention of the government program and hospitals, which increases cash inflow and improves the potential value and opportunities for the company.

Sonic Healthcare is currently the largest pathology service provider in Australia and plays an important role in the delivery of modern healthcare services, estimated to influence approximately 70% of healthcare decisions and 100% of cancer diagnoses.

Sonic Healthcare Shares Acquisition Strategy in 2017

The company has grown mainly through acquisition, having made more than 50 acquisitions since 1987. During 2017, Sonic acquired highly respected laboratories such as Laboratory Bremen and the Stabber Laboratory Group, which contributed to German revenue growth of 20%.

The main issue with this type of strategy is that it always takes a long time for Sonic Healthcare to integrate those new companies and adjust the asset and capital stature. For example, the restructuring of management for the former physical laboratory merger in Hamburg hasn’t yet finished and will require another 6 months to successfully complete.

In addition, acquisitions have a major effect on Sonic Healthcare shares’ balance sheet. The current ratio is 1.3 in 2017, while this company now holds $5.3 billion of intangibles as the company’s major asset, which accounts for approximately 68.31%, two-thirds of total assets.

Sonic Healthcare Stock (ASX SHL) Assets

(Source : SHL 2017 Annual Report, 2017)

Even though it could have a positive impact on the total asset, there is a potential risk that the company cannot pay the debt in short term. Therefore, the level of debt required to make acquisitions is another threat for Sonic. At the end of 2017, Sonic Healthcare stock has 1.5 billion in debt, which is quite high.

Last but not least, if Sonic Healthcare failed to maintain close relationships with the new groups or understand the markets that they operate in, there would be another risk that it could lose business to competitors.

ASX SHL Stock Grew 10% Year on Year

When we look at the key indicators from 2014 to 2016, ASX SHL shares has grown strongly. P/B is stable around 2.4; profit margin is around 9%; ROE increased 8.5% from 10.49 to 12.37; P/E ratio increased from 16.7 to 20.42, approximately 10% each year.

Even though the acquisition projects bring risk for Sonic Healthcare stock, the acquisitions have brought good returns for the risk.

2013 2014 2015 2016 2017
Price to Book (P/B) 2.02 2.23 2.58 2.4 2.59
Price to Earnings (P/E) 15.31 16.7 19.69 20.42 21.36
Earnings Per Share (EPS) 39.1 43.4 45.9 47.3 54.1
Profit Margin 9.78 9.99 8.46 9.16 8.74
Return on Equity (ROE) 11.57 12.49 10.7 12.37 11.54
Year-End Share Price 14.81 17.33 21.37 21.55 24.22

(Source : SHL 2017 Annual Report, 2017)

Potential Growth of Sonic Healthcare Ltd

Overall, in the past five years, ASX SHL stock has been performing very well, with 10% increase in stock price and acquisition of 50 valuable medical services companies since 1987.

In 2017, Sonic Healthcare was successfully selected as the laboratory partner with the Australian Government’s National Bowel Cancer Screening Program and acquired three big laboratories in Germany and United States.

Even though there are concerns about the potential risks from the ability to satisfy the debt and management problems from merger and acquisitions, Sonic Healthcare has the capabilities and resources to manage and make use of new resources to expand their market share and to keep serving the market customers across the world.

The company’s delivery of modern medical services is building confidence with customers and shareholders, therefore, Sonic Healthcare’s future looks to be bright with a strong potential for future upside.

This article on Sonic Healthcare is written by Henry Fung, Managing Director at MF & Co. Asset Management, a boutique investment firm based in Sydney, Australia. For MF & Co.’s full website and further articles follow the link: MF & Co.

Categories: Australian Stocks, Featured, New Zealand Stocks

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