Sonic Healthcare stock downgraded by UBS despite expected margin improvement By Investing.com

On Friday, UBS downgraded Sonic Healthcare (OTC:) Ltd. (SHL:AU) (OTC: SKHHY) stock from Buy to Neutral, adjusting the price target to AUD29.70 from a previous higher figure.

The firm anticipates an increase in Sonic Healthcare’s underlying EBITDA margin, projecting a rise from 17.9% to 18.4% in the fiscal year 2025, following a growth spurt in the second half of 2024.

Sonic Healthcare’s recent acquisitions are expected to contribute an additional AUD665 million annually to the company’s revenue, with a 5% overall revenue growth predicted for FY25.

According to UBS, sales estimates for Sonic Healthcare have been raised by 2-3% due to stronger than expected organic growth in the United States. However, the firm’s EBITDA projections have been lowered by a similar percentage. This adjustment is attributed to persistent labor costs.

Moreover, UBS forecasts a decrease in both EBIT and EPS, anticipating a 6% and 11% respective reduction in FY26 and a 5% and 9% drop in FY27. These declines are due to slight increases in depreciation and interest expenses compared to prior expectations.

Despite improvements in the margin, UBS points out that Sonic Healthcare’s commitment to a progressive dividend may result in a dividend cover falling below 120% in FY25 and FY26. This is even as the EBITDA margin is expected to reach 19.2% in FY27 as per UBS estimates.

The firm notes that while the margin enhancement is significant, the forecast now indicates a low double-digit EPS compound annual growth rate (CAGR) over a four-year period, which is slightly lower than previous estimates.

In other recent news, Sonic Healthcare has been upgraded from a Hold to an Outperform status by CLSA, which also increased the price target to AUD29.70 from AUD26.10. This follows Sonic Healthcare’s fiscal year 2024 results, which saw a 10% year-over-year increase in revenue to A$8.97 billion and an EBITDA of A$1.6 billion, aligning with consensus and guidance figures. The company maintained its fiscal year 2025 EBITDA guidance in the range of A$1.70 billion to A$1.75 billion.

Recent developments indicate an uptrend in organic revenue and potential benefits from mergers and acquisitions going into fiscal year 2026 and beyond. CLSA’s optimism is driven by Sonic Healthcare’s consistent earnings and a reduced likelihood of earnings downgrades in the upcoming fiscal year. The firm believes these factors warrant a higher price-to-earnings (PE) ratio.

As a result, CLSA raised its price target by 14%, reflecting their confidence in Sonic Healthcare’s financial performance and growth potential in the healthcare sector. The updated earnings projections extend to fiscal year 2027, with an adjustment of the forward PE ratio from 18x to 19.6x.

InvestingPro Insights

With Sonic Healthcare (OTC: SKHHY) experiencing a change in its stock outlook from UBS, investors may find additional insights from InvestingPro particularly valuable. Sonic Healthcare has demonstrated a strong track record of dividend reliability, having raised its dividend for 12 consecutive years and maintained payments for an impressive 31 consecutive years. This could be a reassuring signal for income-focused investors, especially in the context of UBS’s concerns regarding dividend cover. Additionally, the stock is known to trade with low price volatility, which may appeal to those looking for stability in their investments.

From a valuation standpoint, Sonic Healthcare currently holds a market capitalization of $8.98 billion. The company’s P/E ratio stands at 25.95, reflecting investor expectations for future earnings. Furthermore, the company has seen a revenue growth of 9.77% over the last twelve months as of Q4 2024, indicating a robust expansion in its business operations. These data points, coupled with the company’s consistent profitability over the last twelve months, underscore Sonic Healthcare’s financial health and potential for sustained growth.

For investors seeking a deeper dive into Sonic Healthcare’s performance and future prospects, there are additional InvestingPro Tips available, offering comprehensive analysis and forward-looking insights.

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