Sonic’s First Half Top Line Strong, but Margin Slightly Disappointing; FVE Trimmed to AUD 27

At face value Sonic Healthcare reported a solid first-half result with organic revenue growth of 5% in constant currency. However, we estimate the equivalent EBITDA growth lagged that at between 2% and 3% up on the previous corresponding period, or pcp. We did not expect this margin contraction and consequently trim our underlying EBITDA margin forecasts for fiscal 2020 and beyond, as well as our fair value estimate to AUD 27 from AUD 28 per share. While Sonic’s geographic spread diversifies regulatory risk, we surmise reduced exposure to Australian laboratories contributed to margin decline in the half, while the company also faced price cuts on certain services in the U.S. Sonic has stated it intends to continue making acquisitions outside Australia and hence we now view the margin reduction as longer term in nature.