Macro Intelligence: Sonic Healthcare’s... Boom or bust?

Article written by Juliette Saly (ausbiz)

In this week’s edition of IG Macro Intelligence, we take a deep dive into Sonic Healthcare (ASX: SHL), a company strengthening its presence in the European market.

Sonic to acquire German medical laboratory group LADR

Sonic Healthcare will acquire German medical laboratory group LADR in a deal valued at $698.5 million (or €423 million). LADR, short for Laboratory Group Dr Kramer & Colleagues, is among Germany's top five medical laboratory groups, with additional operations in Poland and Finland. It has been family-owned and operated for nearly 80 years.

LADR is expected to bring in annual revenue of about €370 million ($610 million) and earnings before interest, taxes, depreciation, and amortization (EBITDA) of about €50 million ($82 million), based on calendar 2024 estimates. Sonic Healthcare is acquiring LADR through a share and scrip deal that includes the integration of the senior leadership team from the German company. Sonic executives say the acquisition will strengthen its presence in Europe.

“This partnership between LADR and Sonic Healthcare Germany marks a significant and strategic step for Sonic in Germany and Europe... We are honoured and excited to begin our collaboration with the Dr Kramer family and their dedicated local colleagues, teams, and partners,” said Sonic Healthcare CEO Dr Colin Goldschmidt.

Sonic expects the acquisition to be immediately earnings per share (EPS) accretive and anticipates full synergies within three years of the deal’s settlement, expected to be completed in the first half of calendar 2025, subject to antitrust clearance.

Sonic Healthcare weekly chart

Strengthening European and global presence

Sonic Healthcare recently spent $655 million acquiring smaller practices in Germany, Switzerland, and the US, further strengthening its European presence as it currently generates about a quarter of its revenue from the US.

At its AGM last month, Sonic reported revenue growth for the first four months of FY25 and reaffirmed full-year EBITDA guidance of $1.7–1.75 billion, up to 10% higher than in FY24.

Last financial year, Sonic’s revenue grew 16% to $8.9 billion, despite a sharp decline in pandemic-related turnover from $485 million to $62 million. Rising costs led to a 25% drop in net profit to $511 million, but management noted that inflationary pressures have begun to ease.

Stocks to watch

1. Sonic Healthcare (ASX: SHL)
2. Ramsay Healthcare (ASX:RHC)
3. Healius (ASX: HLS)
4. Integral Diagnostics (ASX:IDX)

Sonic Healthcare: is the tide about to turn?

Sonic Healthcare shares are down almost 11% year-to-date (YTD) versus a gain of more than 7% in the ASX Healthcare sector and a near 10% gain in the S&P/ASX 50 Index, of which Sonic is a constituent.

However, ASX Tradewatch data suggests the trend could soon reverse, with Sonic currently in a medium-term rally as confirmed by multiple indicators. The 5-day moving average (MA) is above the 50-day MA, while the 20-day MA is also rising.

Sonic Healthcare weekly chart

Broker recommendations and price targets

The average recommendation for the stock is a 'Hold', according to Refinitiv, with a price target of $27.62. This suggests a further 3.5% downside from current trading levels. The most recent broker update, prior to the LADR acquisition, comes from Ord Minnett. The firm has a 'Lighten' recommendation on the stock with a price target of $23.85.

Sonic stock performance

Revenue and earnings outlook

Ord Minnett analysts noted that Sonic Healthcare's latest update showed stronger-than-expected revenue growth in the first four months of FY25, surpassing the broker's forecasts.

The firm predicts Sonic’s revenue will grow by 8.3% and earnings by 10% in the first half of FY25. However, it anticipates slower growth in the second half, forecasting revenue to rise by 5.3% and earnings by 4%. Rising costs remain a concern, with analysts warning that they could continue to squeeze profit margins.

Analyst recommendations and stock performance

Comparing Sonic's ROE to the sector

Sonic Healthcare (ASX: SHL)
Return on Equity (ROE): 6.5%

• Index average: -35.8%
• Index median: -2.5%
• Skewed by: Regis Healthcare (ASX: REG) and Healius (ASX: HLS)
• Comparable peer: Ramsay Healthcare (ASX: RHC).

Ramsay Healthcare

The average broker recommendation for Ramsay Healthcare is a 'Hold', with a price target of $44.99, suggesting the stock could rise a further 13%. However, ASX Tradewatch data indicates that investors see little value in holding Ramsay Healthcare at this time, with shares in a bearish downward trend.

Ramsay Healthcare stock performance

Healius

Healius shares are also in a long-term bearish trend. Citi recently upgraded its view on Healius to 'Neutral' from a sell but lowered its target price to $1.05 from $1.50.

Healius daily chart

Integral Diagnostics

Elsewhere, the average recommendation on Integral Diagnostics (ASX: IDX) is a 'Buy', with a price target of $3.21, suggesting the stock can run a further 10%. In the past week, Bell Potter initiated coverage on the stock with a 'Buy' rating and a $3.97 target price, following the company’s proposed merger with Capitol Health, subject to Australian Competition and Consumer Commission (ACCC) clearance.

Integral Diagnostics stock performance