Sonic Healthcare plummets following earnings downgrade

Shares in global pathology and radiology group Sonic Healthcare (ASX:SHL) fell more than 11% after the company turned an earlier earnings nudge into a full-blown downgrade.

The shares fell to a day’s low of $23.58 before recovering some ground to trade around $24.36 at midday, off 8.5%.

The slide came after the company warned that the weakness seen in earnings at the halfway mark had become a full-blown slide.

Sonic said, "It is now forecasting (with two months’ trading outstanding) Earnings Before Interest, Tax, Depreciation, and Amortization (‘EBITDA’) for FY 2024 of approximately $1.6 billion on revenues of approximately $8.9 billion.”

That was after the interim release in February maintained the guidance issued last August and at the AGM later in the year for EBITDA of $1.7-1.8 billion but with the caveat that it was “now considered more likely to achieve EBITDA towards the lower end of the range.”

The lower end of the range has slipped by $100 million or a large $200 million from the top of the previous range.

Sonic said the weakness was despite continuing solid ‘organic revenue growth’ at 6% for the January-April period.

But it said that "profit growth has been lower than expected, in part due to inflationary pressures on the business, and exacerbated by currency exchange headwinds.”

"In addition, a number of margin improvement initiatives planned for completion in H2 FY 2024 have been slower to deliver than expected and will contribute to further earnings growth in FY 2025.

"The inflationary pressures are expected to ease going forward, with headline inflation rates in Sonic’s main markets already reduced to a range of 1.4% to 3.6%."

And there’s not much in the way of growth forecast for 2025 either. Sonic said that based on preliminary forecasts, "on a FY 2024 forecast constant currency basis, Sonic expects to achieve EBITDA of approximately A$1.70 – 1.75 billion in FY 2025.”

"The FY 2025 forecast includes the negative impacts of the potential USA PAMA fee cut ($15m), initial losses on the UK Hertfordshire & West Essex NHS contract (A$10m), and an equity accounted loss for ($5m). Guidance for FY 2025 will be updated/confirmed at Sonic’s full-year results’ release in August 2024."

CEO Dr. Colin Goldschmidt said in Tuesday’s update that “The 2024 financial year has been one of transition for Sonic Healthcare, moving away from pandemic conditions into a more normal business environment.”

"Our current robust topline growth, organic and non-organic, in a setting of inflationary cost pressures, have combined to delay the completion of our programs to align labor costs more closely with post-pandemic conditions. These unique business conditions have also made forecasting our earnings unusually difficult this year."

“Overall, the company remains in a very strong position, both financially and in terms of market positioning. We remain well set for growth in revenues and earnings going forward, including realizing over the next two years the synergies and enhanced returns from the investments made this year."

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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