Is Sonic Healthcare Limited a buy after its latest acquisition?

The latest acquisition is expected to grow Sonic Healthcare Limited's (ASX:SHL) earnings this year.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Pathology business and serial acquirer, Sonic Healthcare Limited (ASX: SHL), announced a further German acquisition to the market this morning.

The purchase of specialist pathology service Medical Laboratory Bremen ('MLB') will cost approximately €63 million and is expected to grow Sonic's earnings per share by approximately 2% in the first year. MLB appears a nicely profitable business that is expected to remain attractive for many years in the future, owing to its specialist nature. The purchase will be funded from Sonic's existing cash reserves.

With approximately 412 million shares on issue, a 2% increase in earnings per share (to just over 106 cents per share) looks to equate to roughly an A$8.5 million increase in profit. That represents a purchase price for MLB of around 10x profit, using today's exchange rate.

Is Sonic a buy?

Sonic is currently priced at around 19 times last year's profits, just above the ASX average. Its businesses – pathology services – are reasonably defensive, although subject to potential changes to regulation and government reimbursement as we have seen in recent times.

The company has good diversification, with operations in most developed economies:

source: Company reports
Source: Company reports

Global diversification both minimises the impact of regulatory changes in any one country, as well as mitigating some of the impact of currency movements, since Sonic uses debt in local currency wherever possible. 59% of Sonic's revenues were earned overseas in 2016.

Although Sonic uses debt to acquire businesses, it retains a fairly strong balance sheet with $2.1 billion in debt, and annual interest expense of about $60 million. Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA) of $831 million covers the interest expense 14 times over, meaning the company is quite capable of covering its debt.

I like Sonic, and the company appears to have been prudently run in the three years I've been covering its announcements. The downside is that it is a mature business, and most of the earnings growth comes through acquisitions. The high price of some of Sonic's acquisitions – like the 10x profit for MLB – suggests that it is difficult to find attractive businesses on the cheap.

Sonic would suit long-term shareholders looking for reliable dividends, a defensive business, modest growth via acquisition and possibly share buybacks down the track.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »