Australia | Mar 24 2021
This story features SIGMA HEALTHCARE LIMITED. For more info SHARE ANALYSIS: SIG
Having completed its efficiency drive, Sigma Healthcare is looking to M&A to enable future growth
-Diversification should enable margin expansion
-M&A increasingly in focus
By Eva Brocklehurst
Having reinstated a contract with Chemist Warehouse as a distributor, Sigma Healthcare ((SIG)) is now pondering its future growth path. The company's FY21 results were heavily boosted by the pandemic as well as the introduction of the new Chemist Warehouse contract. Hospital sales grew 15% but were well below FY20 growth of 26% because of reduced elective surgeries.
Gross cash conversion of 18% disappointed Credit Suisse as inventory rose, while growth in operating earnings (EBITDA) of 10% out to FY24 is anticipated, amid cost reductions and increased efficiencies.
Sigma Healthcare now has around 50% exposure to non-PBS (pharmaceutical benefits scheme) earnings, and more diversity in its income profile should enable continued margin expansion in the broker's view.
Macquarie notes 17% of consumer expenditure is now within the Sigma Healthcare network of branded pharmacies, making it the next largest group after Chemist Warehouse. Moreover, FY22 should benefit from being the first full-year of the Chemist Warehouse contract renewal.
The contribution to revenue from Chemist Warehouse is expected to reach $800m/year by June 2021, having provided $759m in FY21.
The company has reiterated an underlying operating earnings target of around $100m in FY23 and reinstated the dividend with a 70% fully franked pay-out ratio. Still, after a recent move in the share price Citi considers the stock fairly valued and downgrades to Neutral from Buy.
Upside risks, the broker observes, include higher pharmacy market growth and M&A, while the downside risk encapsulates a more rapid normalisation of pharmacy market growth and execution in the case of the earnings target.
Sigma expects organic growth in wholesale revenue at above market rates over the next 12 months, although Citi suspects this will probably not be double digits.
Market growth is likely to be subdued in FY22, Macquarie agrees, while prescription items are expected to grow 3-4%. Over-the-counter sales could be muted as well as the market is in decline, reflecting lower export demand and the impact of the pandemic on specific categories.
An over reliance on the Chemist Warehouse contract for growth does pose a medium-term risk if Chemist Warehouse gains enough scale to manage supply independently, the broker asserts.
Management has indicated M&A is increasingly in focus now that the capacity exists on the balance sheet following the sale/lease back of two distribution centres. The more efficient network is now expected to deliver a 30% improvement in productivity. There is also a 12% improvement in logistics costs per unit anticipated as the company leverages infrastructure investment.
Areas of interest the company has alluded to include medical consumables and devices. Credit Suisse suspects acquisitions could focus on the hospital segment.
Project Pivot restructuring has also been completed with attention now turning to digital implementation of the ERP system. While a share buyback remains an option the company is not active and growth/dividends are to the fore.
FNArena's database has four Hold ratings and one Buy (Credit Suisse). The consensus target is 68c, signalling -1.4% downside to the last share price.
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