The Sonic Healthcare Ltd (ASX: SHL) share price has jumped more than 6% after the global pathology business announced its FY22 result.
Sonic has operations across Australia, New Zealand, Europe and the US. It has, and still is, playing a key part in testing for COVID-19.
Sonic’s FY22 result
The healthcare business managed to report more growth in FY22, despite the huge level of COVID testing in FY21:
- Revenue rose by 7% to $9.34 billion
- EBITDA (EBITDA explained) went up 11% to $2.83 billion
- Net profit after tax (NPAT) rose by 11% to $1.46 billion
- Operating cashflow increased 9% to $2.23 billion
- Earnings per share (EPS) up 11% to 302.5 cents
- Final dividend of $0.60, up 9%
- Total dividend of $1.00, up 10%
In terms of Sonic Healthcare’s base business revenue, which excludes COVID-19 testing, it rose 2.1% year on year to $6.9 billion. The second half of FY22 saw base business revenue growth of 3.4%. Ongoing growth of this segment will be important for the Sonic Healthcare share price, as it is what will drive the underlying performance from here as COVID testing slows down.
Sonic said that the underlying industry growth drivers remain strong, including ageing and growing populations, preventative medicine and new tests.
COVID-19-related revenue was up 13% year on year to $2.4 billion. Over 55 million COVID PCR tests have been performed between March 2020 to now.
Looking at the main markets, Australian pathology saw total revenue growth of 24%, with COVID revenue growth of 143%. However, the base business organic revenue was down 1% compared to FY21 due to the effects of the pandemic.
USA total revenue was down 6%. The base business saw organic revenue growth of 2%, but COVID revenue was down 38%.
Germany total revenue rose 5%, with the base business growing revenue by 3% and COVID revenue rising 9%.
Partnership with Harrison.ai
During the year, Sonic bought a 20% stake of artificial intelligence business Harrison.ai. This partnership could help margins and be a boost for the Sonic Healthcare share price over time.
Harrison.ai has an existing joint venture called Annalise.ai, a market leader in radiology AI. It’s capable of detecting 124 findings, it’s marketed internationally with over 500 global installations to date, including more than 100 Sonic radiology sites. A brain CT scan product is about to be commercialised, with tools for other modalities to follow.
Franklin.ai is Sonic’s joint venture with Harrison.ai to develop best-in-class AI diagnostic tools for pathology. The product development and implementation strategy is “well underway”. It’s targeting first product release within two years.
Outlook for FY23 and the Sonic share price
Management said that the base business growth is expected to accelerate, partly thanks to a backlog of testing postponed during the pandemic. In July 2022, the base busines organic revenue grew by 3.9% year on year.
COVID testing continues, though future levels will depend on how things evolve. July 2022 saw COVID revenue of A$94 million. Sonic pointed to heightened awareness of respiratory illneses driving demand for both COVID and other respiratory virus tests.
In terms of costs, wage increases are expected to “moderate”, staggered by the impacts of multi-year agreements. There are ongoing adjustments to staffing levels to match COVID volumes and there is a focus on automation and innovation. Consumables cost reduced in FY22, with no net price increases expected in FY23.
The progressive dividend strategy is expected to continue in FY23 and beyond. Management noted that the on-market share buy-back of up to A$500 million is “well progressed”.
I think that Sonic has a promising future. It won’t shoot the lights out, but the growth of the base business, continuing COVID testing and bolt-on acquisitions are an attractive combination.
In my opinion, Sonic is an attractive defensive business. The dividend yield, including franking credits, of 4% is also pretty good.
