Sonic Booms In Europe

This story features SONIC HEALTHCARE LIMITED. For more info SHARE ANALYSIS: SHL

-Robust growth in Swiss market
-Pressures remain in Oz, US
-More acquisition potential
 

By Eva Brocklehurst

Sonic Healthcare ((SHL)) has raised its profile in Switzerland, with agreement to acquire Medisupport, a laboratory operation which will triple the size of the company's Swiss enterprise. The acquisition is considered 8.0% earnings accretive and leave the company well placed to be a major player in a market which is showing robust growth.

Macquarie notes Medisupport offers a range of genetic testing, which should allow Sonic Healthcare to bring back in-house a number of tests previously outsourced. Medisupport has developed a proprietary offering in non-invasive pre-natal testing and the company will look to leverage this asset across its European business, with global potential. All up the broker considers the deal a positive one, with material earnings upgrades and a number one position in an attractive market. Further scope for other acquisitions exists in Europe, as the company remains a key player in a very fragmented market.

Medisupport employs more than 700 and has operations in 10 cities. The acquisition is dependent on regulatory approvals but Morgans considers these highly likely. The deal is expected to close next month so FY15 estimates are unaffected. Morgans increases FY16-17 divisional revenue forecasts to $728m from $240m and earnings to $170m from $50m.

The acquisition may propel the company to number one in Switzerland and deliver incremental earnings growth but Deutsche Bank suspects consensus numbers are too high. The broker believes there are few positive catalysts on the horizon, citing reimbursement pressure in many of the company's markets. As debt facilities are largely drawn down, there is also less likelihood of further deals. The acquisition will be funded by a combination of 85% debt and 15% equity. The heavy weighting to debt will allow Sonic Healthcare to take advantage of very low rates on offer. Deutsche Bank downgrades to Hold from Buy, envisaging limited upside to its target of $22.

Shares will be issued to the founders of Medisupport and they are expected to continue in executive roles on a long-term basis. The metrics of the deal impress Credit Suisse, with the purchase price of $453m comprising CHF277m in cash, debt funded, and CHF50.5m in terms of the share issue. A minimum number of 3.6m shares will be issued. Relative to key bank covenants, Credit Suisse estimates substantial head room exists, allowing further potential for acquisitions.

JP Morgan was surprised at the deal, having anticipated acquisitions would come from core geographies. Still, the company is no stranger to Switzerland, having a smaller scale operation in that country. Medisupport generates attractive margins which, with synergies, can make it one of the highest margin operations in the company's portfolio. Incentivising management with equity is considered particularly attractive in this deal.

The broker notes the Swiss market is particularly stable from a reimbursement perspective. Synergies are particularly encouraging and procurement the biggest opportunity. Sonic Healthcare will also be able to merge the two Zurich labels will can generate further synergies in around 12 months time. While there is no sign of the company being vulnerable on funding it should be contemplated at some point, JP Morgan suggests. 

Citi welcomes the deal, having already factored in $200m in acquisitions over the next five years, given the company's plans to grow acquisitively. This particular acquisition bettered the broker's expectations and, if Sonic Healthcare can add more at similar metrics, then there is upside risk to the broker's forecasts. Citi re-models its base case, no longer including acquisitions per annum, and this results in a reduction in overall earnings per share estimates on a standalone basis. 

FY15 remains a challenge, particularly with the challenges in US and Australian pathology businesses, UBS maintains. Potential upside is provided by the Canadian and UK contracts which should accelerate growth in FY16/17. The broker concedes the opportunity for acquisitions still exists, including Germany. Morgan Stanley also considers the transaction will augment solid organic growth, the recent Canadian contract and FX tailwinds.

On FNArena's database there are four Buy ratings and four Hold. The consensus target is $22.51, which compares with $20.77 ahead of the announcement and suggests 7.4% upside to the last share price.Targets range from $21.34 to $24.13. 
 

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