For clients that have elected the “Blend” Australian equity option we have purchased Sonic Healthcare, one of the world’s largest medical diagnostics companies, providing clinical laboratory and radiology services. It is the largest pathology company in Australia, Germany Switzerland & the UK, and the third largest in the USA. In Australia Sonic is also the largest operator of medical centres in partnership with 1700 doctors at over 200 clinics, and the second largest radiology provider with over 100 centres.

We are attracted to Sonic in the medium term for the following reasons:

  • It stands to benefit from increased demand for its services due to an ageing population, a focus on preventative medicine and new developments in diagnostic testing
  • Further acquisitions provide opportunity for synergy benefits and higher margins from volume related efficiency gains given fixed cost leverage
  • It is a potential beneficiary of further government outsourcing of diagnostic testing, particularly in the UK
  • A domestic review of pathology collection centre rents could result in the reduction of a major cost item to the business

The single largest ongoing risk relates to regulatory changes including unexpected healthcare funding cuts in the major markets in which it operates, though for FY17 at least this risk appears to be fairly benign.

The purchase is being funded from the sale of Orica as ammonium-nitrate (AN) continues to be materially oversupplied in the company’s largest markets of Australia and N. America, placing pressure on explosives prices. Given the fixed cost nature of AN production this oversupply is likely to remain in the short term as producers aim to maximise plant utilisation.

If you have any queries, please contact your Elston adviser.