Sonic loses almost $1bn from market value despite flagging return to profit growth

The pathology titan’s core business has rebounded from pre-pandemic levels, with CEO Colin Goldschmidt forecasting 5 per cent earnings growth in the year ahead.

Pathology giant Sonic is forecasting a return to earnings growth in the year ahead after its annual net profit more than halved as its lucrative Covid-19 testing business evaporated.

Artificial intelligence and a European acquisition spree are expected to help lift the $16bn company’s earnings in the next 12 months, following the end of billions of dollars from Covid-19 tests inflating its balance sheet.

Still its forecast of earnings before interest, tax, depreciation and amortisation rising to $1.7bn to $1.8bn - implying 5 per cent growth - fell short of consensus analyst estimates of about $1.85bn.

The weaker-than-expected guidance sent Sonic’s shares tumbling more than 5.8 per cent to $31.99. The losses shaved almost $1bn of its market value, which eased to $15.1bn.

Chief executive Colin Goldschmidt said Sonic was transitioning from “high volume” Covid-19 testing to business as usual.

“In the post-pandemic environment, our management teams around the globe are focused on base business organic growth and margin improvement,” Dr Goldschmidt said.

“We have locked in major initiatives in our businesses to promote earnings growth over coming years, including adjusting our workforce to match the vastly reduced Covid-related revenues.”

But Dr Goldschmidt said Sonic’s base business revenue – which excludes pandemic services – firmed 11.2 per cent to $7.51bn, driven by gains across its Australian, German and Belgian laboratory businesses.

As a result, Sonic maintained its progressive dividend policy, hiking its final investor payout for the year by 2c to 62c, after earnings per share jumped 19 per cent on pre-pandemic levels.

Sonic Healthcare chief executive Colin Goldschmidt.

“Pleasingly, base business organic revenue growth gained momentum during the year, with 6 per cent growth in the first half, and 9 per cent in the second. Strong growth has continued into July 2023,” Dr Goldschmidt said.

Taxpayer-funded Covid-19 tests delivered a bonanza to listed pathology companies, including Sonic, Healius and Australian Clinical Labs, fuelling record earnings and generating billions of dollars in revenue.

In 2022 alone, Sonic reaped $2.43bn. But in the year to June 30, revenue from Covid-19 tests dived 80 per cent to $485m, following the end of government-enforced restrictions, including mandatory isolation and mask wearing to curb the spread of the virus.

Overall net profit fell 53.1 per cent to $685m, below analyst consensus estimates of $724m.

Earnings per share dived 53.3 per cent to 145.8c compared with 2022. But jumped 19 per cent from 122.5c recorded in 2019 – which Dr Goldschmidt said highlighted solid growth on pre-pandemic levels.

But Ord Minnett analysts said its EPS was 8 per cent below consensus estimates of 154c.

“Overall, the result was a miss on Ord Minnett estimates and consensus with NPAT and EPS down between 6-9 per cent,” Ord Minnett analysts said in a note to investors.

RBC Capital Markets analyst Craig Wong-Pan also said the company’s guidance was lower-than-expected.

“Net interest expense is expected to increase by about 25 per cent (implies $92m vs RBC’s estimate of $96m) which suggests some downgrades to consensus EBIT numbers,” Mr Wong Pan said.

“Management said the company’s strong growth has continued into Jul 23. We expect the earnings miss in FY23 and disappointing guidance for FY24 to be taken negatively by the market.”

Dr Goldschmidt said the use of artificial intelligence – in which Sonic has made several investments in via joint ventures – across its pathology and radiology businesses would lead to “step changes” in efficiency, quality and capacity in coming years.

“We are investing in IT and infrastructure, including for digital pathology, to unlock these material upsides. Our Franklin.ai joint venture is nearing completion of its first AI product, with validation studies and field trials to commence in early 2024.

“Harrison.ai, in which Sonic has a 20 per cent interest, continues to progress its radiology AI joint venture and Sonic is already using their chest X-ray product throughout our radiology operations, whilst the second product, for CT brain, is currently being evaluated by our practices.”

Sonic also made three acquisitions – with a total enterprise value of $890m – during the past six months, including The Diagnosticum Laboratory Group and Medical Laboratories Dusseldorf in Germany and Synlab Suisse in Switzerland.

Dr Goldschmidt said the laboratories were “high-quality” and “well-respected” with strong cultural alignment with Sonic, and complementary footprints with our existing operations.

He said the company had the balance sheet strength for further takeovers and was “currently progressing several new acquisition and contract opportunities”.

The company will pay its final dividend of 62c on September 21.