Sonic Healthcare (SHL) – Margin squeeze

Sonic Healthcare offers medical diagnostic and administrative services to medical practitioners, hospitals, community health services, and patients in Australia, the US, Germany and elsewhere. Sonic Healthcare is headquartered in Sydney.

Sonic Healthcare has invested more than $2.3 billion in mergers and acquisitions in the US over 20 years, and the region now accounts for 23% of group revenue and 18% of earnings. The US market is dominated by two large competitors, Quest Diagnostics and Laboratory Corporation of America, however, making it challenging for Sonic to achieve national scale. This has left the forecast post-tax return on invested capital (ROIC) for the US operations at circa 5.8%, indicating it is the lowest margin division within Sonic’s global pathology business. The fragmented market offers potential M&A targets, but competition from the national players is intense.

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Given the challenging market conditions, Ord Minnett suggests Sonic might consider selling its US assets. If sold at a multiple of 11–14xforecast 2026 operating earnings (EBITDA), the proceeds could be used to buy back its shares, improving ROIC to around 6.8%. That said, we expect Sonic will more likely focus on improving operating leverage and extracting synergies from previous acquisitions than selling assets.

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The company needs to decide whether to continue investing in the US or redirect capital to higher-margin regions. We maintain a $26.50 price target and a Lighten recommendation.

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