Covid-19 delivers Sonic Healthcare a $2.4bn bonanza, shares up 6pc

The pandemic and taxpayer-funded Covid-19 tests has propelled ASX-listed pathology group Sonic Healthcare to deliver record revenue of $9.34bn.

Shares in Sonic Healthcare surged more than 6 per cent after the ASX-listed pathology group lifted its dividend almost 10 per cent as Covid-19 testing generated more cash than it anticipated.

Revenue from Covid-19 testing soared 3 per cent to $2.4bn in the year to June 30, comprising more than a quarter of the group’s total revenue, which jumped 7 per cent to a record $9.34bn.

Net profit leapt 11 per cent to $1.46bn, triggering the group to lift its final dividend 9.1 per cent to 60c a share, taking its total investor payout for the year to $1 a share.

Chief executive Colin Goldschmidt did not give any guidance for the year ahead, saying it “remains difficult to predict future revenues from Covid-19 testing”.

“However we do expect ongoing demand, coupled with seasonally weighted increased testing for other respiratory viruses,” he said.

“Twelve months ago, we would never have expected our Covid-related revenues to grow by 13 per cent in 2022. Sonic Healthcare and our people have continued to play a major role in combating the Covid-19 pandemic during the 2022 financial year.

“Since the start of the pandemic we have performed over 55 million Covid-19 PCR tests across our seven countries of operation, in addition to providing Covid-related antibody testing, genetic sequencing and vaccination services. Concurrently, we have also provided non-Covid essential medical diagnostic services for more than 100 million patients a year.”

The group will pay its dividend on September 21. Investors lapped up the result, with Sonic’s shares vaulting 6.2 per cent to $35.24 by the close of trade on Wednesday.

People queue for Covid-19 testing at Melbourne Town Hall. Picture: David Geraghty/NCA NewsWire

Sonic’s result underscores how taxpayer-funded Covid-19 tests have delivered a bonanza to Sonic and other listed pathology companies, including Healius, Australian Clinical Labs and Integral Diagnostics.

At the start of the pandemic, Covid-19 tests attracted a $30 Medicare subsidy, which rose to as high as $100 a test in recognition of the need for pathology companies to invest increasing capacity. But before the Omicron wave hit earlier this year, the subsidy eased to $85 per cent and analysts are predicting it could fall further to $34, which would put it on par with government-funded influenza testing.

Sonic’s laboratory division margins increased from 30.8 to 32.2 per cent, thanks to Covid-19 testing. But radiology margins were lower due, with Dr Goldschmidt citing “pandemic impacts and the relatively low margin of the acquired EMI (Epworth Medical Imaging) business.

Jarden analyst Steve Wheen said Sonic delivered a better-than-expected result overall, with revenue was in line with his forecasts and 1.6 per cent ahead of consensus.

“Group EBITDA margin was better than expected which was due to higher Covid revenues (higher margin business) than anticipated. The base business was more mixed with the US and Germany coming in lower than forecast while Australia was better,” Mr Wheen wrote in a note to investors. He has a neutral rating on the stock with a $29.87 target price.

“There was no guidance for FY23 but base business is improving, with Jul-22 base business organic revenue growth of 3.9 per cent, noting organic base business growth for FY22 was 2.1 per cent.

“Cost pressures don’t appear to be as noticeable as in other diagnostic companies, with Sonic’s outlook highlighting moderate wage increases, consumable costs expected to have flat pricing and inflationary pressures on relatively minor cost categories. Ultimately, we see this as a better-than-expected result, but Covid revenues continuing to prop up the slower-than-expected recovery of the base business globally.”