Sonic Healthcare Shares Drop Most in 16 Years After First Profit Warning

Sonic Healthcare Ltd. fell the most in 17 years in Sydney trading after the provider of medical tests said full-year profit will be as much as a fifth less than forecast.

Sonic lost 20 percent to A$10.07 on the Australian stock exchange, the worst decline since November 1992. The drop erased A$990 million ($820 million) from the market value of the nation’s biggest pathology provider on trading volume that was almost 10 times the previous year’s daily average.

At least three brokerages cut their ratings on Sonic after yesterday’s announcement, the Sydney-based company’s first profit warning since it went public in 1987. Net income in the year to June 30 will fall to between A$290 million and A$295 million after cuts in government subsidies, Sonic said, missing analysts’ estimates by as much as 11 percent.

“The company’s downgrade yesterday suggests that revenues are softening in Australia on the back of weak industry volumes, lost market share and increasing competition,” Angus Gluskie, who oversees $300 million at White Funds Management Pty in Sydney, said in an e-mail. The funds hold Sonic shares.

The Australian pathology business is Sonic’s biggest revenue contributor, accounting for 29 percent of sales in the year ended June 30, 2009. Sonic is the country’s market leader with a 41 percent share, according to David Low, an analyst at Deutsche Bank AG in Sydney.

Earlier Forecast

The company had projected in August that full-year earnings would rise as much as 15 percent from the A$315 million posted in the last 12-month period. Sonic was expected to report profit of A$327 million, according to the average of eight analyst estimates compiled by Bloomberg.

“This is a temporary phenomenon that we are almost fully recovered from,” Sonic Chief Executive Officer Colin Goldschmidt said on a conference call yesterday. “We expect to be returning to normal growth as of 2011.”

Sonic forecast profit growth of 10 percent to 15 percent in the fiscal year starting July 1, based on average currency values in the current 12-month period.

Bank of America Merrill Lynch cut the rating to “neutral” from “buy” and trimmed the stock price estimate by 15 percent to A$12.95. Morgan Stanley reduced its recommendation to “equal-weight” from “overweight,” and cut the price estimate by 25 percent to A$11.87, the brokerage said in a report today.

UBS, JPMorgan

UBS AG cut its 12-month price estimate for Sonic by 19 percent to A$12.13, and maintained a “neutral” rating on the stock. JPMorgan Chase & Co. reduced its recommendation to “neutral” from “overweight.”

Stuart Roberts, an analyst at Southern Cross Equities Ltd. in Sydney, said the selloff in the stock presents an “excellent buying opportunity.” The analyst raised his rating on the shares to “buy” from “accumulate” and reduced his 12-month price estimate by 9.7 percent to A$14.

“In the long run, what counts in terms of the creation of shareholder value is that management was able to quickly fix the problem,” Roberts wrote in a note today. Sonic was able to “‘face the brutal facts’ and act on those facts. We think this cultural strength of Sonic’s will help drive a recovery in its Australian business in FY11,” he said.

To contact the reporter on this story: Lena Lee in Singapore at llee42@bloomberg.net.

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