Sonic Healthcare Limited (SHL)

Technological innovation has cut the cost of a general pathology test, translating to fatter profit margins. SHL leverages this know how into overseas markets to deliver the next leg of growth. The US, Germany and UK offer scope to deliver efficiency through acquisitions. International scale will further enhance SHLs buying power. Management believes its franchisee business model by empowering its operators to share in profits delivers sustainable earnings growth.

NPAT increased 24% to $245.1, the result inline with our forecast of $246.8m. Acquisitions distort the result a fairer view is diluted EPS growth which increased 12% to 73.5cps. SHL guidance for FY09 is for revenue growth to be greater than 15% and EPS higher than 10%.

Australian pathology grew its revenues by 8%, higher than market growth. Turmoil caused by the consolidation of Primary and Symbion is leading to market share growth. The current Memorandum of Understanding (MOU) in the pathology industry is set to expire at June 2009. The new government is in the process of a strategic review to determine future funding for both radiology and pathology. The pathology industry doesn’t know what will be the outcome of this review. SHL says it is the most efficient provider of service so will cope better than most if fees fall. SHL USA delivered strong organic revenue growth of 8%. The alignment of the two largest US health funds with two different pathology providers has opened the door to third parties. Third parties can offer pathology services to all. This market development has led to a rapid revenue growth for Sunrise, SHL’s New York business. Germany is half the size of NSW with a population of 80m. Population concentration means SHL is able to optimise its regional infrastructure through consolidation. SHL is developing centres of excellence and folding overlapping acquired infrastructure into these. Closing collection centres, laboratories and pushing more volume through a single facility lowers unit cost and increases returns.

Fair Value for the stock is around $15 Current $12.94

Excluding dividends expect a growth of 14%

A 2H fully franked dividend of 32cps will be paid on October 9

Ratios

P/E 17

P/E Growth 1.17

Dividend 4% (100% franked)

Betta 0.76