Australia | Dec 18 2006
By Greg Peel
Sonic Healthcare (SHL) has agreed to acquire southern US pathology company AEL for US$180m, funded through debt. AEL boasts annual revenues of around US$100m. JP Morgan describes the acquisition as “clearly a major positive”.
JP Morgan now anticipates Sonic will draw more attention from the market and probably be re-rated. Others brokers are not disagreeing. Morgans sees 8% upside to consensus earnings for FY08.
Morgans had already factored acquisition value into its numbers, so the analysts have not “materially” changed the numbers. However, they have a habit of constantly moving target prices around and between this report and last, Sonic has increased from $14.23 to $15.64. Morgans remains Overweight.
ABN Amro also likes the deal, and further notes that the Australian government has recently agreed to increase funding for veterans by $600m and increase Medicare funding for pathology and diagnostic imaging. Add this to the acquisition, and ABN has lifted Sonic’s earning by 3% in FY07 and 8% in FY08.
ABN has jumped Sonic’s target right up from $12.20 to $14.75, but despite the stock closing at $13.56 on Friday, retains Hold.
UBS was more enthused. It upgraded to Buy while lifting the target from $13.16 to $15.18. Earnings were lifted by 3.5% in FY07 and 10% in FY08.
UBS analysts have set a 20% “premium to peers” in their valuation to “reflect the possibility of follow on acquisitions in the US and Europe”. JP Morgan analysts suggest any further acquisitions before 2009 will provide upside to their valuation.
UBS has declared Sonic its top pick in the domestic healthcare sector.
In the FNArena database, Sonic rates a B/H/S ratio of 4/6/0. Most of the Holds are on the basis Sonic’s share price has already run well, however this acquisition may prompt a rethink from more than just the three reporting this morning.
The average target now stands at $14.17.