• Disruptive technology leading to reduced diagnostics costs.
• Competitive threats leading market share loss.
• Deregulation resulting in new pathology collection centres.
• Adverse regulatory changes (fee cuts).
• Disappointing growth.
• Adverse currency movements (AUD, EUR, USD).

Figure 1: SHL Revenue by Segment

Source: Company

• FY18 key results. FY18 results were in line with management guidance and management noted that SHL’s performance in FY18 was strong both financially and operationally. Key figures from the results were: 1. Underlying EBITDA on actual currency basis was up +8.3% to $962m over the pcp (+6.4% growth on constant currency basis). 2. Revenue grew by +8.2% to $5.5bn driven by Laboratory (Europe) which was up +14.5%. 3. Net profit was $476m (up +11.2%) and Earnings per share (EPS) grew +9.9% to $1.12 per share. 4. The board declared a final dividend of 49cps (up +6.5% pcp), bringing the total FY18 dividend to 81cps, growth of +5.2% pcp. Management suspended the DRP for the FY18 final as the debt cover ratio is now in line with the preferred long term average ratio and SHL has headroom of ~$650m to fund its future expansions and acquisitions.

• FY19 guidance. Management provided solid FY19 guidance, in our view, with key figures being: 1. Expectations of EBITDA growth +3-5% (constant currency basis) and +5-7% on current exchange rates. 2. Interest expense to grow by ~4% assuming constant currency. 3. Tax rate at ~25%. 4. Incorporates known fee reductions in Germany and USA equivalent to ~2% EBITDA. 5. Management expects continued strong organic growth and continuation of progressive dividend policy. No regulatory changes are expected in FY19 except the ongoing fee changes which have been already factored in the guidance. 6. Management noted that SHL has a rich pipeline of acquisitions, JVs and contract opportunities for FY19. 7.Pathology Trier acquisition in Germany is to be EPS accretive in FY19.
• Capital management. 1. Total debt saw an increase of $48m in FY18 to A$2,483m, largely due to exchange rate changes and partially offset by net cash generated. 2. In October, SHL refinance EUR160m of debt with 7 and 15-year tenors at 2% fixed rates, bringing the total weighted pretax average cost of debt to ~2.6%. 3. Net cash available is at ~A$650m, after the FY18 final dividend is paid out. 4. Debt cover ratio decreased from 2.7x to 2.5x in FY18 and is in line with SHL’s preferred long term position.

SHL FY18 RESULTS SUMMARY

Figure 2: SHL revenue results summary

Source: BTIG, Bloomberg

Source: BTIG, Bloomberg

Source: BTIG, Bloomberg

Source: BTIG, Company, Bloomberg

COMPANY DESCRIPTION

Sonic Healthcare (SHL) is a medical diagnostics company with operations in Australia, New Zealand, and Europe. The company provides a comprehensive range of pathology and diagnostic imaging services to medical practitioners, hospitals and their patients along with providing administrative services and facilities to medical practitioners. SHL has three main segments: (1) Pathology/clinical laboratory services based in Australia, NZ, UK, US, Germany, Switzerland, Belgium and Ireland. (2) Diagnostic imaging services in Australia; and (3) Other which includes medical centre operations (IPN), occupational health services (Sonic HealthPlus) and laboratory automation development (GLP Systems).