SHL

Sonic Healthcare has a raised share price target of $17.94 (up 11 cents) from Australian shares analyst Citi Investment Research. Pathology service providers in Australia have commonly provided benefits to referees from medical centres in the form of above-market leases to attract or retain referrals. SHL's estimated number of collection centres referred to in this legislation is 340, plus a further estimated 60 within its subsidiary IPN. From 1 March 2008 all such leases are required by law to be renegotiated to market rate. The analysts estimated this will reduce Sonic Healthcare's operating lease expense by 10% or $9.2m. Last week, IPN announced that the number of GPs working in its centres had increased 18.1% since 30 June 2006 to 698. Forecast EBITDA from completed acquisitions has been lifted by $5m. The sale of a loss-making hospital on 12 June, lifts 2008E PBT $800k. With three laboratories already closed and a personnel infrastructure in place to leverage synergies, Sonic Healthcare has lost no time in implementing a program to leverage its incremental volume. Assets in this space are commonly capitalised at 12-13x EV/EBITDA. Sonic Healthcare has acquired $430m of revenue in the USA for an average 9x EV/EBITDA. The analyst sees this cheaply acquired revenue as underpinning Sonic Healthcare's market capitalization. This company keeps on kicking goals. The recent strengthening of the management team with the appointment of an experienced global purchasing manager and an acquisitions specialist continues to build confidence that Sonic Healthcare will be Australia's 4th successful global healthcare company.

Sonic Healthcare has acquired Swiss pathology company Medica for CHF98m (A$97m) which will be 100% debt funded. Australian stockmarket analysts Citi Investment Research estimated EV/EBITDA takeover multiple for the business at ~9.0x. This compares to Healthscope's offer for Symbion's pathology business at an EV/EBITDA of ~17x. Sonic Healthcare's strategy is to focus on privately held acquisitions with low acquisition multiples. The analysts forecast an increase in EPS of 1.8% in FY08 and 2.3% in FY09 from the Medica acquisition. Sonic Healthcare flagged at its 1H07 results that it was looking to expand its European presence. They view thisacquisition as positive as the pathology reimbursement environment in Switzerland is generous. There is also potential opportunity for cross-border transfer of specimens between Germany and Switzerland. Expect further European acquisitions. Latest aquisition underpins shareholder wealth as Sonic Healthcare's management team has consistently resisted the urge to go wild with a chequebook and pay lofty multiples. These have been prolific of late, e.g, Quest/Ameripath at 17.3x, MDS Diagnostics at 17.7x, and HSP/SYB at 17.3x. In contrast Sonic Healthcare has acquired two businesses in the USA in the last 20 months at EV/EBITDA multiples of ~9.4x, building critical mass at minimum entry prices. Synergies will start to flow in 2009, Sonic Healthcare is integrating the two US businesses, increasing volume throughput in TDL in the UK, automating Australia, and creating a platform in Europe with opportunities for Schottdorf & Medica to work together. Earnings in 2009 will be significantly improved by synergistic benefits.

Sonic Healthcare share trading update from sharemarket analyst Citigroup Investment Research: There have been three major deals in the pathology space this year: the acquisition of MDS Diagnostics in Canada, with 40% of the Canadian market; the acquisition of Ameripath by Quest Diagnostics in the USA, and the current non-binding offer for Symbion by Healthscope in Australia. What-if Analysis Reveal SHL Good Value: The analyst has developed a table of financial comparatives and extrapolated the resulting multiples, applying these to SHL. This exercise is a 'what-if' scenario, as valuations are affected by business mix within the pathology businesses, and also in the case of Symbion by the number of non-pathology/DI businesses. Global Market Acquirors Placing 49% Premium above Current SHL Multiple: A current average acquisition multiple, pre synergies, being offered for pathology businesses globally has been calculated at 17 times EV/EBITDA. Applying this multiple to SHL gives a value of $21.20 per share, a 49% percentage premium over the current share price. Victorian Market Shifts May Result in Positive Earnings Fallout for SHL: If ACCC requires HSP to sell-down pathology market share in Victoria in the event of a successful bid for SYB, this could be potentially excellent news for Sonic Healthcare. The analyst's estimate, post bid, of the pathology market share for HSP is 66%. If HSP had to sell, for example, the Gippsland acquisition this could increase throughput in SHL's labs by 10% or $45m. This equates to around $9m PBT. There may also be GP drift from HSP to SHL.

Sonic Healthcare (SHL) have now now reached critical mass in the USA with its recent acquisition of American Esoteric Laboratories in December 2006. Market analyst, Citigroup Investment Research thought they would compare the combined productivity of Sonic Healthcare's two acquisitions, CPL and AEL, relative to other laboratory service providers in the USA to assess the current efficiency and possible upside of the combined Sonic US businesses. The limitations to this approach include the underlying business mix, with esoterics being more labour intensive than routine tests. If the business is more hospital focused there will also be fewer Patient Service Centres (PSCs) which we have used as one of our productivity measures. PSCs are where commercial laboratories have leased space in order to collect samples. The exercise in productivity comparison is to see whether SHL can improve its current productivity ratios in three areas relative to other major commercial laboratories in the USA. These are revenue per employee, revenue per laboratory and revenue per PSC. While such an exercise does have some limitations it is one measure of earnings opportunities which may flow from growth by acquisition in the USA for Sonic Healthcare. The analysts have concluded, based on analysis of comparable performance benchmarks of other US commercial laboratories, that SHL's greatest upside lies in increasing revenue per laboratory in the USA.

Sonic Healthcare (SHL) has a raised target price of $17.54 per share from analyst Citigroup Investment Research following FY08 estimated earnings having been increased by 3.6%. Sonic Healthcare's legal challenge in New Zealand against the awarding of the new community laboratory services contract to Lab Tests Auckland, a company 76.7% owned by Healthscope has been successful. This is a NZ$560m eight year contract, with estimated EBITA margins of 20%. The District Health Boards (DHB) will now have to discuss with SHL interim measures while it considers whether to do a full RFP or maintain the status quo. The High Court declared Lab Test’s contract "invalid and of no effect". At its last AGM SHL stated that 7% of its pathology revenue came from New Zealand, of which 4% came from its Auckland business, Diagnostic Medlab. The analyst estimates that the eight year contract, if it is awarded to SHL again, will increase Earnings Per Share (EPS) by 3.6% in FY 2008. Prior to this win for SHL we had taken the conservative position of removing the contract earnings from the analyst's forecasts from FY2008. Reinstating this contract’s earnings in their DCF values SHL at $16.72, with a 12 month target price of $17.54. SHL appealed on three grounds and won on two of them. The strongest point was that the High Court had found that the DHB had not consulted with the PHCs, which they are required to under NZ law. The difficulty with an appeal is that the DHB would need to prove that they had consulted with the doctors. Throughout this case the medical practitioner professional bodies have been extremely supportive of SHL. It would be difficult for the DHB to garner support from a group so clearly evidently in the SHL camp.

Sonic Healthcare (SHL) have a retained Buy, Medium Risk rating from analyst Citigroup Investment Research (CIR). The company produced a 15% increase in cash generated from operations, delivered 21.6% EBITDA/revenues, PBT income increase of 8.8%, lower radiology earnings as forecast, and a lower effective tax rate. SHL reported 1H earnings of $93.5 million vs. CIR's A$89.9 million forecast. Core pathology revenues are up 16.5% to $675m, and pathology margins excluding CPL, expanded by a further 50bp to 21%. Pathology now represents 83% of SHL's revenue. Radiology revenues are flat as anticipated at 1.2%, and EBIT fell to $21.7m vs $28.7m in the pcp. CIR anticipate radiology will continue to decline as a proportion of the business. Management believes that radiology margins will improve from here due to recent restructuring. CIR forecasts have them declining from 2007 until 2009. SHL announced a new UK NHS contract which is material to TDL. No new investment in TDL is required. The contract is for five years and is 'multi-million pounds and material to TDL'. SHL is well positioned to continue to benefit outsourcing to the private sector by NHS. Rationalisation of AEL will be centred on Dallas and Tyler, with Dallas being closed and the business being funneled to Austin and some into Memphis. AEL's Nashville HO will close in July. SHL now has scale in the USA with revenues of about $400m. The court case in New Zealand re the Auckland pathology contract has concluded. In the event the awaited finding is not in SHL's favour, management states some asset write-down of an estimated $20m may occur.

Sonic Healthcare (SHL) has a new 12 month share price target of $16.54 (from $17.08) and the DCF is $15.79 from share analyst Citigroup Investment Sevices (CIR). . Sonic Healthcare bought out the outstanding minorities in CPL following the purchase of AEL (which has pathology operations in Texas and Louisiana. Minorities impact NPAT by $4.9m. AEL and CPL have overlapping pathology laboratories and collection centres in Texas. This will facilitate rationalisation between AEL and CPL, and reduce the 'free kick' to minorities of CPL if bought out between 2009 and 2012 as first planned. SHL paid US$300m plus an earn-out of $US20m for 82% of CPL in October 2005. A similar multiple on the outstanding 18% would have valued the minorities at $US70m. SHL has paid an extra $12.7m for the early buy-out, indicating a high level of confidence by the management that the cost savings which will result from the rationalization of the two businesses are significant. No estimate of these has been given. The dilutionary impact of 7.7m options, 4.6m issued in 1H2007, has increased their fully diluted shares on issue since the last note. A $2 per share price appreciation increases the dilutionary impact. They have used a cost of debt of 5.5%, removed minorities of $4.9m, and adjusted for the extra 4.17m shares on issue. Gearing of 70% is historically high, so a capital raising is a possibility. A High Court hearing in NZ is set for 12 February 2007. This will determine whether SHL is able to retender for a lost contract, worth $12m EBITA.

Sonic Healthcare (SHL) have a share price target of $17.08 from shares analyst Citigroup Investment Research. The price target has been revised upwards by 12.3 percent. Sonic Healthcare have acquired American Esoteric Laboratories Inc. (AEL) for an EV of US$180m with settlement mid January 2007. This lifts revenues in the USA by 51% to an estimated $396m. The new acquisition strengthens Sonic Healcare's presence in Texas and Tennessee, with four more laboratories, the newest of which in Dallas is to be closed prior to completion of the sale. This volume will be relocated to Tyler, Texas. Revenue split is 2/3 Tennessee and 1/3 Texas, so around US$30m of sales will be consolidated in the one Texan plant. In addition, patient centre rationalisation between Tyler and CPL in eastern Texas will lead to further rationalisation benefits. SHL will become a larger player in the USA as a result of this acquisition. This may make the two largest competitors, Quest and Labcorp with 60% market share of the private pathology market, become more aggressive in SHL’s territories when contracts are negotiated. Intangibles probably exceed $500m, so underpinning cashflow is important.

Sonic Healthcare (SHL) has a Buy stock recommendation and a 12 month share price target of $15.21 from stock analyst Citigroup Investment Research (CIR) who have initiated coverage. Sonic is a story about global leverage: leverage of a successful Australian business model to international markets; leverage of global size to negotiate with suppliers from a position of strength; leverage of its professional knowledge to benchmark laboratories globally against its own centres of excellence; and leverage of its Australian developed proprietary technology across all geographic regions.

Sonic Healthcare (SHL) have a Buy stock recommendation and a 12 month share price target of $15.21 from stock analyst Citigroup Investment Research (CIR) who initiated coverage over the shares with this stock recommendation. CIR values the healthcare company at $14.50 using DCF.