Sonic Lowers Earnings Outlook

By Glenn Dyer | More Articles by Glenn Dyer

Healthcare has been one of the better areas for local investors in the past year, but suddenly there are shoals ahead with a couple of surprise earnings downgrades emerging from major operators in the past week.

Last week Primary Health Care (PRY) chopped its estimate for 2014-15 profit and yesterday Sonic Healthcare (SHL) joined in.

The two companies operate in different areas of the sector – Primary is big in GP surgeries, Sonic is a major pathology laboratory services operator.

Both downgrades are not huge amounts of lost earnings – just enough to worry already nervy investors.

Yesterday Sonic told the ASX that it had reduced its earnings forecast for the June 30, 2015 financial year due to a rise in costs and lower volumes affecting the pathology market.

Sonic said the company now expects earnings before interest, tax, depreciation and amortisation (EBITDA) of about $A730 million in the year to June, before one-time costs of about $A13 million. That is 3 to 4% below previous guidance.

Sonic went on to say it sees a rebound in the current financial year, forecasting expected EBITDA to be about 20% higher in 2015-16 at between $A850 million and $A875 million, before one-time items.

Sonic said the weaker result flowed from lower than forecast processing volumes for its pathology operation, changes to fees for certain tests, and a further rise in specimen collection infrastructure costs.

SHL 1Y – Lower pathology volumes hurt Sonic

Primary shares fell sharply last Thursday after it snuck out a profit downgrade late Wednesday.

In that update, Primary said, "Trading in 4Q FY 2015 has been weaker than expected with subdued patient volumes. This has been driven by a range of factors, including extreme weather events particularly in NSW, and a relatively mild cold and flu season compared to the prior period.”

Primary downgraded its 2014-15 full year earnings forecast to $400 million, from earlier range of $410-425 million.

Primary also said its earlier guidance of a one-off tax refund of $130 million would more likely come in at about $50 million. The revision came after Primary said it would assume the tax liability for doctors who were affected by the ATO ruling about how Primary should treat the cost of "practice acquisitions", which are upfront payments made to lock doctors into five-year contracts.

Primary shares closed off 0.2% at $4.75 yesterday – down around 8% from before the downgrade (the shares closed at $5.19 last Wednesday, before the downgrade after trading).

By contrast, Sonic shares were off 2.8% yesterday at $21.25 – a far milder punishment than for Primary shares where the fall was over 10% at one stage last Thursday.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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