Sonic Healthcare (SHL) Stock Recommendation

Submitted by Craig Strzelecki on 21 March, 2007 - 17:31

Sonic Healthcare (SHL) has a raised target price of $17.54 per share from analyst Citigroup Investment Research following FY08 estimated earnings having been increased by 3.6%. Sonic Healthcare's legal challenge in New Zealand against the awarding of the new community laboratory services contract to Lab Tests Auckland, a company 76.7% owned by Healthscope has been successful. This is a NZ$560m eight year contract, with estimated EBITA margins of 20%. The District Health Boards (DHB) will now have to discuss with SHL interim measures while it considers whether to do a full RFP or maintain the status quo. The High Court declared Lab Test’s contract "invalid and of no effect". At its last AGM SHL stated that 7% of its pathology revenue came from New Zealand, of which 4% came from its Auckland business, Diagnostic Medlab. The analyst estimates that the eight year contract, if it is awarded to SHL again, will increase Earnings Per Share (EPS) by 3.6% in FY 2008. Prior to this win for SHL we had taken the conservative position of removing the contract earnings from the analyst's forecasts from FY2008. Reinstating this contract’s earnings in their DCF values SHL at $16.72, with a 12 month target price of $17.54. SHL appealed on three grounds and won on two of them. The strongest point was that the High Court had found that the DHB had not consulted with the PHCs, which they are required to under NZ law. The difficulty with an appeal is that the DHB would need to prove that they had consulted with the doctors. Throughout this case the medical practitioner professional bodies have been extremely supportive of SHL. It would be difficult for the DHB to garner support from a group so clearly evidently in the SHL camp.

Sonic Healthcare Limited is listed on the Australian Stock Exchange (ASX) under stock code SHL. You can view their investor website here. SHL was listed on the ASX on 30 April, 1987. Find out the meaning of the recommendations in this primer. Barry S Patterson is the chairman of Sonic Healthcare and Dr Colin S Goldschmidt is the Managing Director. Sonic Healthcare provides pathology services. The company is a dedicated medical diagnostics company operating in Australia, New Zealand, Germany, the United Kingdom and the USA. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade SHL. Check your charts and good luck with your share trading!