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Why the Sonic Healthcare share price surged out of its trading halt today

It’s unusual for an ASX stock to rally after announcing a big capital raising but the Sonic Healthcare Limited (ASX: SHL) share price is doing exactly that.

The SHL share price surged 2.9% to $22 in late afternoon trade after emerging from a trading halt to complete its $600 million placement that was priced at $19.50 a share.

Sonic isn’t the only ASX stock in its sector that is enjoying support today with the Healius Ltd (ASX: HLS) share price surging 4.8% to $2.50 and Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC) share price adding 0.4% to $54.38 although the Healthscope Ltd (ASX: HSO) has eased 0.5% to $2.20.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index looks on track to finish the day with a 0.3% gain.

Sonic is also undertaking a share purchase plan (SPP) to raise another $100 million to help fund a $750 million acquisition of US-based Aurora Diagnostics.

Broker upgrade

What could be driving shares in the pathology services group higher is an upgrade by Citigroup. The broker has lifted its recommendation on the stock to “buy” from “neutral” as it increased its earning forecast for the group to account for the acquisition.

Citigroup has also pegged a price target of $25.25 a share on Sonic, which gives the potential return on the stock of around 20% if the dividend is included.

But the broker has flagged some concerns about the transaction and capital raising.

“We question the appropriateness of raising equity at ~10.5x EBITDA and 52-week low when SHL has the balance sheet capacity to fully debt finance the deal. The transaction costs are also excluded from the presented pro-forma estimates; adding $20m in costs would push the multiple paid to ~9.4x EBITDA,” said Citi.

“Despite the publicly available financials of Aurora, we have limited visibility on the organic business given that it was acquired from private equity and will need more time to assess its market position.”

But investors seem to have already made up their minds about the deal. The surge in the Sonic share price will also almost guarantee that the SPP will be very well supported, if not oversubscribed, as shareholders are given the chance to buy new shares at the lower price of $19.50 or the five-day volume weighted average price of the stock prior to the SPP deadline.

Foolish takeaway

The strategic rationale for the acquisition appears to be sound and complements Sonic’s existing operations.

There are also cross-selling opportunities between Aurora and Sonic and the merger will lift the group’s exposure to the lucrative US market.

But most experts do not think the Sonic share price is cheap as a fair bit of good news is reflected in its current share price.

This is why I think there is better value ASX buys elsewhere.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Ramsay Health Care Limited. 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 Scott Phillips.

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