since there was a bit of interest i attach my notes after going through the transcript. held mid weight.
SHL FY 25
NPAT numbers missed by 7% revenue in line. 2026 guidance (+19%) was about 7% better than my 2026 estimate, putting the 2026 number about level. Note guidance was “up to 19%”
Positive was that cash returns are starting to pick up after 4 years. The ROE remains low.
Management points out that the three years post-C19 there were 5% CAGR wage rises, which were more than revenue fee increases, and now they are seeing this tide turn back. Indicating opening jaws after profit compression. Let’s see.
2026 eps growth is assisted by large M&A, as well as expected synergies from these acquisitions in Switzerland and Germany.
Fee pressure again reared its head in Germany. The US exhibited operational issues in anatomical pathology; it has been problematic, and the loss of the Alabama ct, replaced with an NJ contract. US remains competitive with Labcorp and Quest.
Australia is still having issues with rent kickbacks; SHL is now reducing sites operating from standalone large centres. Number four player 4Cyte? identified as the problem.
Inherent profitability has been the main issue post-C19. In the 8 years to C19, NPAT margins averaged 8.8% and 5.5% in the last two years. The inflationary wage issue may be a cause of this, as well as ongoing fee compression. SHL really needs to open up the gap between revenue and cost growth; of course, a large part of that is out of their hands, wages and government fee schedules; they have operational efficiencies and scale as positives.
Valuation- assuming 14% 5Y cagr eps growth, which includes NPAT margins back to 7%, given the above looks possible, generates a return of 10%pa, and at a 18X exit PE, at $28. If the growth is 7% ie, no change in NPAT margins and only increases with revenues, $21 is the buy price. The market has lost patience with this one, and it will need to show some operational leverage.
never happen while CS is in charge, but ShL could perhaps consider selling the US and concentrating on Europe Aust and ROW with a zero debt level. where it has a chance of a competitive advantage.
From a broader perspective, for me, SHL raises the investment philosophical question: is it better to wait for evidence of improvement before investing? is the market not efficient enough to price in improvement quickly, allowing you to buy at a good value? the alternative is to wait for something that you believe will come, but of course, timing is uncertain. This is a tricky one, and my observed outcomes go both ways, ie waiting for real evidence of improvement versus buying LT value and waiting for mean reversion. the latter is riskier. maybe a blend across the portfolio is worthwhile (just thinking aloud).
