Could this ASX healthcare share surge on COVID-19 testing?

Sonic Healthcare Limited (ASX: SHL) shares could surge on the back of a recent contract win from the Australian Government to test for COVID-19.

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Testing for the COVID-19 pandemic is an important step in re-opening the Australian economy. The Sonic Healthcare Limited (ASX: SHL) share price could be poised to surge higher in 2020 after the company was recently awarded a contract from the Australian Government to test for COVID-19.  

What contract has Sonic won?

Last week, Sonic Healthcare informed the market that the company had been awarded a contract from the Australian Government to provide rapid sample collection and testing for COVID-19 in residential aged care facilities.

With elderly Australians being the highest priority, approximately 2,700 aged care facilities across the country will be eligible for the service. Sonic will provide testing through its national network of laboratories and collection teams.

Sonic Healthcare's laboratories in New South Wales and Queensland were the first in Australia to perform high-volume COVID-19 testing during the early stages of the pandemic. According to management, Sonic's laboratories have processed almost 20% of all COVID-19 tests in Australia.

Sonic has collectively tested more than 100,000 Australians for COVID-19 and is poised to roll out additional testing platforms across the country.

How has Sonic performed in the pandemic?

Sonic is the third-largest pathology provider in the world, generating revenue from radiology and pathology services. Despite being initially sold down heavily, the Sonic share price has bounced back more than 30% from its low in mid-March.

In late March, Sonic Healthcare informed the market it was withdrawing its earnings guidance for FY20 due to the uncertainty of the CVOID-19 pandemic. The company reached the decision after social isolation and quarantine measures impacted normal diagnostic volumes as patients opted to delay routine testing.

In addition to playing a crucial frontline role, Sonic assured shareholders that the company remained in a strong financial position with a balance sheet boasting almost $1 billion in cash on hand.

Should you buy?

Sonic Healthcare has a history of fuelling growth through acquisitions and winning new contracts. In addition to the contract win from the Australian Government, Sonic has also partnered with philanthropic organisation Minderoo Foundation to increase testing capacity for COVID-19.

If testing proves a successful measure in aged care facilities, the company could be in line for a wider range of contract wins. With the COVID-19 pandemic still an evolving situation, I think Sonic Healthcare's contract win could have great potential in the short and medium-term.

Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Sonic Healthcare 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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