Compelling Value Remains in Pathology After a Strong Industry Start to Fiscal 2025

Australian pathology market growth, measured by Medicare benefits paid excluding coronavirus testing, was up a strong 11% in first-quarter fiscal 2025. Demand for pathology is defensive and underpinned by population growth, aging demographics, higher incidence of diseases, wider adoption, and a higher number of tests available. In the long term, we expect margin expansion on increased operating leverage from higher volumes and improved labor productivity as digitization and newer artificial intelligence tools expedite diagnoses. We also expect average fee increases through stronger pricing, additional government funding, and favorable mix benefits. Shares in narrow-moat Sonic Healthcare are undervalued versus our unchanged AUD 32 fair value estimate, as well as in no-moat Healius.