Purchase of Sonic Healthcare (ASX: SHL)

22nd March 2024

Across the Australian Equity component of investor portfolios, we have bought Sonic Healthcare (ASX: SHL). Sonic Healthcare is a multinational provider of pathology & radiology services.

Sonic is a leading global pathology lab operator. It is the largest player in Australia, Germany, the UK and Switzerland, and is the third largest in the US. It is also the second largest radiology provider in Australia, with over 120 radiology centres.

We are attracted to Sonic for the following reasons:

An extremely well-run business – retention of high calibre medical talent and long term shareholder returns have been driven by having Doctors and Medical Professionals running the business, combined with sound financial management
Sonic has a strong market position globally in an industry with high barriers to entry
Excess cash on the balance sheet allows for further acquisitions and potential buybacks
The business has defensive pathology and radiology revenues and is the leader in premium anatomical pathology tests for specialists

Sonic has three key levers for value creation that we would like to highlight:

The rollout of digital infrastructure, including AI technology will help drive efficiencies across the business. Sonic is also focused on rolling out it’s AI businesses, Franklin & Harrison AI, and its new digital pathology platform from the pathology watch acquisition across its digital infrastructure internally. This digital infrastructure and AI technology has the potential to be sold globally in countries where Sonic does not operate.
Sonic prefers to operate in specialist and hospital markets for pathology. The Medical Leadership Culture strengthens relationships with other medical professionals and this is a key competitive advantage for Sonic.
The surge in covid-19 testing has left the business with a strong balance sheet that has excess cash. This can be deployed for acquisitions or to increase shareholder returns from additional dividends and buybacks.

We have funded the purchase of Sonic via the sale of Virgin Money UK (ASX: VUK). Virgin Money UK is a UK bank serving both retail and commercial customers.

VUK is currently subject to a preliminary takeover offer from Nationwide Building Society (Nationwide) at £2.20 per share which is approximately AU$4.20. VUK trades at a mid-single digit spread to the takeover offer and we believe it is unlikely VUK sees a higher offer. In addition to this there are pressures to give building society members a vote on whether the transaction should go ahead which may create uncertainty around the transaction proceeding.

As always, thank you for your support. If you have any questions or would like more information, please contact your adviser.

Warnings and disclosures

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