Should I buy Sonic Healthcare shares at $35?

The Sonic Healthcare Ltd (ASX: SHL) share price has dipped to around $35. In this article, we’re going to look at whether the ASX healthcare share is an investment opportunity.

Sonic is an international healthcare provider with “specialist operations in laboratory medicine and pathology, radiology, general practice medicine and corporate medical services”.

The company employs more than 1,650 pathologists and radiologists, as well as over 14,000 medical scientists.

What’s been happening recently?

Involvement in extensive testing during the COVID-19 lockdowns was a big period of earnings and cash flow for the business. With operations in Australia, the United States, Germany and the United Kingdom, Sonic was integral in the fight against COVID-19.

The ASX healthcare share used those extra earnings to improve the company’s debt situation on the balance sheet. Motley Fool analysts recently called it a “master stroke in business”.

Non-COVID earnings have kept increasing, but the Sonic Healthcare share price has dropped around 25% from its December 2021 peak. This makes it much cheaper today. In the FY23 half-year result, non-COVID testing revenue increased 9% year over year.

As the company improves its balance sheet, it has been putting the COVID-19 cash and more recently-made earnings to work.

Acquisitions to boost scale

Within the last four months, the company has been busy in Europe, making deals that can boost its operating leverage. This should be helpful for Sonic Healthcare shares in the coming years.

At the start of April, it revealed the €190 million acquisition of Diagnosticum Laboratory Group, one of the largest clinical and anatomical pathology laboratory groups in southeast Germany, around Dresden. It’s expected to generate revenue of €65 million in FY24.

Near the end of April, Sonic Healthcare announced it was acquiring Medical Laboratories Dusseldorf for €180 million. This business is expected to generate revenue of approximately €50 million in FY24. It’s reportedly one of the leading clinical laboratories in Germany’s most populous state.

The most recent acquisition was Synlab Suisse in Switzerland for around CHF150 million. This company has 19 laboratories and is one of the few laboratory groups with coverage of all three Swiss language regions. It provides services to GP, specialist and hospital clients “across the full range of routine and specialty laboratory medicine.”

Sonic said the Swiss transaction would add to earnings per share (EPS) from the 2024 calendar year and that the return on invested capital (ROIC) will exceed Sonic’s cost of capital “within two years of acquisition”.

How much does the Swiss deal help operating leverage? Sonic explained:

EPS and ROIC accretion will increase substantially as significant synergies in multiple areas of infrastructure and operations (including procurement) are achieved.

Long-term profit and dividend growth expected for Sonic Healthcare shares 

FY23 is a transitional year for profit because it’s compared to FY22, which included a lot of COVID testing revenue.

According to Commsec numbers, Sonic is expected to generate EPS of $1.52 in FY23, $1.56 in FY24 and $1.65 in FY25. These numbers put the Sonic Healthcare share price at 23x FY23’s estimated earnings and under 23x FY24’s estimated earnings.

Sonic says it has a progressive dividend strategy, and Motley Fool analysts are”confident its dividends per share will continue to grow sustainably”.

The forecast on Commsec suggests that by FY25, it could be paying an annual dividend per share of $1.13, which would be a grossed-up dividend yield of 4.6%.