COVID testing demand means record result for Sonic Healthcare, but market sniffles on outlook

Shares in Sonic Healthcare (ASX: SHL) have dropped 4 per cent today as worries over future demand for COVID-19 PCR (polymerase chain reaction) tests outweighs record profits.

The Sydney-based healthcare provider, which also has significant operations in the US, UK, Germany and Switzerland, posted a seven per cent increase in revenue to $4.8 billion for the December half and a net profit of $828 million, a rise of 22 per cent.

The business has increased its net debt, having spent $585 million during 1H22 on acquisitions and investments, including acquiring US-based ProPath for US$110 million and Australian company Canberra Imaging Group for$60 million, as well as investing in Sydney-based Harrison.ai.

Even after the investments and the announcement of a $500 million buy-back of its shares, debt-to-equity ratios are at a record low, with the business sitting on more than $900 million of available liquidity.

“Sonic has continued to assist the communities in its markets in combatting the pandemic by providing high-volume, high-quality PCR testing, antibody testing, genetic sequencing and vaccination services,” Sonic’s CEO, Dr Colin Goldschmidt, said.

“At the same time, we have never lost focus on the essential nature of our non-COVID base business, medical diagnostic services, and have continued to provide these services seamlessly for millions of patients throughout the pandemic.

“The company’s organic revenue growth for the half-year was 7 per cent, with base business organic growth of 4.3 per cent augmented by growth in COVID related revenues. Revenue growth was particularly strong in our Australian Laboratory division. Sonic’s EBITDA grew 18 per cent, well above revenue growth, clearly demonstrating the operating leverage in our businesses.”

Ongoing base business growth, alongside pandemic-driven testing, has helped raise the first-half dividend payment by 11.1 per cent to 40¢ per share.

Revenue from laboratory testing increased 38.3 per cent in Australia against H120, growing to $1.3 billion. Revenue from European lab testing grew one per cent over the same period to $1.7 billion, while revenue in the US dropped 8.7 per cent over the same period.

The business expects COVID testing requirements to continue in the near-term future and has confirmed an active pipeline of M&A opportunities.

However, guidance for 2H22 was not provided as COVID revenues remain unpredictable. Although PCR testing in Europe remains high, Australia and the US are experiencing a slow-down in testing requirements.

The business’s base growth, mainly its radiology and primary care medical centres, is expected to grow and may benefit from a potential post-pandemic rebound.

“Sonic’s global management teams continue to focus on identifying and assessing synergistic acquisitions and outsource contracts,” Dr Goldschmidt said.

“Sonic is well-positioned to continue to invest in and expand the business with an active pipeline of opportunities under evaluation, backed by a very strong balance sheet.”

The business has provided initial funding for a Sonic Healthcare Foundation of $40 million to help progress sustainability initiatives as part of its broader commitment to the community.

Shares in Sonic Healthcare (ASX: SHL) had dropped 3.83 per cent at the time of writing to $36.16 each following the published half-yearly results.