Sonic Healthcare

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.