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Goodbye Chemist Warehouse, Hello Capital Return?

Australia | Jul 03 2018


Stockbrokers are still not keen on buying Sigma Healthcare shares, though a capital return might change their view.

-Loss of major contract with Chemist Warehouse represents 40% of annual sales
-Brokers uniformly reduced forecasts and valuations
-Instead, Chemist Warehouse has negotiated five-year contract with Ebos Group

By Sarah Mills

The big news – we use the term loosely — yesterday was confirmation of Sigma Healthcare's ((SIG)) loss of the Chemist Warehouse contract after June 30, 2019. The prospect had been well aired but the market had been awaiting evidence.

The loss of the contract will hit revenue by roughly -40%, which will translate into earnings-per-share. On the upside (again a loose term) about $300m in working capital will be released. Sigma has also had some time to prepare for the news, although not much has been provided by way of guidance.

Post announcement, stockbrokers UBS, Credit Suisse, Citi and Morgan Stanley uniformly cut earnings-per-share estimates and target prices, but varied in their investment opinions.

Falling Valuations, Price Targets

Already bearish on the stock, the news did little to alter UBS’s view. The broker retained its Sell rating, noting Sigma faces a few trading headwinds, likely PBS-related price erosion and continues to trade on a high price-earnings multiple relative to the ASX-200 (ex-resources). UBS' target price falls to 45c from 75c.

Citi, also a former bear, took the opposite tack and upgraded to a Buy from a Sell, noting the share price had already fallen -40%.

The broker cited capital management and acquisitions as key risks given the tightening of Sigma’s financial straps. It cut the target price to 55c from 70c and cut earnings-per-share -15%, -34% and -17% across the FY19 to FY21 reporting period.

Release Of Capital?

Credit Suisse retains its Neutral rating and cut the target price to 52c from 82c. The broker is keeping its gunpowder dry, believing Sigma’s decision on managing the $300m in working capital that will be released at the end of the contract will be critical to the outcome.

The broker suggests astute merger and acquisition activity could result in a higher valuation, but if the money stays on the balance sheet, not so much.

Morgan Stanley retains its underweight rating and believes the stock is now de-risked. But like UBS, it sees a challenging trading environment ahead, which will likely be only modestly mitigated by the capital release. The broker’s target price falls to 43c from 80c.

Now that the dust has settled on the broken relationship with Chemist Warehouse, FNArena's consensus price target has fallen to $0.48 (from $0.76) with Citi carrying the sole Buy rating in the FNArena universe.

The contract to supply pharmaceutical products to Chemist Warehouse represents around 40% of annual revenues for Sigma Healthcare. Those sales will shift to New Zealand-based pharmaceutical distributor Ebos Group which secured a five-year contract worth $1bn annually to replace Sigma.

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