Sonic Healthcare Limited (ASX: SHL) is a Sydney-based international medical diagnostics company. It is active in eight countries: Australia; New Zealand; United Kingdom; Germany; Switzerland; Belgium; Ireland; and the USA. The company specialises in pathology, diagnostic imaging and other services for over 200 eye care clinics and more than 1,600 general practitioners. Australia accounts for approximately half the revenue and half the profit but expected expansion overseas will see a change in those proportions.
Sonic Healthcare has a dominant position in the Australian medical diagnostics market and is the largest Australian pathology laboratory operator. This scale gives it a significant cost advantage. Having established market dominance locally, the company is focusing efforts on strengthening its position in the US and Europe. As in Australia, economies of scale overseas will improve margins and profitability. It is conservatively estimated that overseas earnings growth will be sustained at 10% per annum for at least the next five years due to ageing populations and innovations in pathology technology.
The interim report for the half-year ending December 31 recorded a NPAT of $177 million, which was 17.7% better than the previous corresponding period. Revenue came in at $1,898 million, which was an 11.9% increase on the previous period. CEO, Dr Goldschmidt, added: "The true strength of Sonic lies in our unique culture of medical leadership, which differentiates us from competitors both for organic growth and for acquisitions. Our culture and values bind and motivate Sonic's 26,000 staff to deliver outstanding service to customers and better health outcomes to communities."
Over the last eight years return on equity has always been above 10%, averaging 12.4%. Primary Health Care Limited (ASX: PRY) averaged only 6.8% return on equity over the same period. Debt for Sonic is relatively high at 67% as at June 30 last year, which is more than adequately covered at 8.1 times. However, Ramsay Health Care Limited (ASX: RHC) has an even worse ratio of 81.8%, covered 7.4 times.
Foolish takeaway
I expect Sonic Healthcare to grow at over 10% for each of the next five years, and continue positive growth for much longer. Costs are continuing to be lowered giving better margins, leading to strong growth in earnings per share. The dividend at 3.5% will continue to increase as earnings improve. It should be mentioned that in the last two years franking has been kept to 45%. Unfortunately, there has been a pattern of reduced franking credits commensurate with the relative earnings generated overseas. However, a falling Australian dollar will more than compensate the franking credit situation with improved earnings and better dividends. Therefore, I consider this to be a stock with very low risk for the long-term investor wanting capital gains and a reasonable dividend for the next 20 or 30 years.
