Sigma Healthcare Limited

Company Overview: Sigma Healthcare Limited (ASX: SIG) is engaged in the business of wholesale and distribution of medicine services to community and hospital pharmacies in Australia. The company has one of the largest pharmacy networks in Australia, with more than 1,200 branded and independent stores. Established in 1921, SIG remains on track to expand its foothold in the hospital pharmacy services and other healthcare service adjacencies.

SIG Details

Higher Investments & Ongoing Customer Loyalty Aid SIG: Sigma Healthcare Limited (ASX: SIG) delivers medicine services to community and hospital pharmacies in Australia. The company remains on track to invest in its IT systems across the business, to boost its overall network infrastructure, people, and emerging business. The company has also made notable steps to execute the SAP S/4HANA Enterprise Resource Planning (ERP) system by investing ~$65 million to offer key milestones in capability and data intelligence in 4QFY21. Higher investments will aid the company into standardised ERP system and integrate the core processes necessary to handle SIG’s warehouse, sales, supply chain, products and finance, and asset management activities across the Group. Apart from implementing ERP, the company had deployed new Customer Relationship Management (CRM) system in March 2020. An enterprise CRM creates an opportunity for the company to augment and strengthen its loyalty and customer retention by building a single, shared view of its customers.

Coming to FY21 results (for the year ended 31 January 2021), the company’s sales revenue came in at $3.4 billion, depicting an increase of ~4.8% year over year. The increase was primarily due to robust pharmacy sales growth (excluding Chemist Warehouse), which went up by ~11.4% year over year. However, Chemist Warehouse sales declined around 11.9% on pcp in FY21, indicating the end of the supply of PBS medicines. Nevertheless, the company’s retail brands remained on track to outpace average market growth. FY21 also benefited from the continuous expansion of businesses amid the challenges led by the global pandemic. In FY21, underlying EBITDA went up a whopping 39.4% year over year and came in at $81.8 million, depicting robust sales performance and incremental profits from the execution of Project Pivot as well as the Distribution Centre optimisation plan. Underlying Net Profit After Tax (NPAT) in FY21 came in at $29.1 million, up by 132.8% on pcp. Underlying ROIC returned to 10.1% in FY21, as compared to 7.1% in FY20, mainly due to intensive capital investment program. Going forward, the company expects underlying ROIC to grow in the low to mid-teens.

Revenues Highlights; Analysis by Kalkine Group 

Key Metrics, Balance Sheet & Decent Liquidity Position: The company exited the period with a cash balance of $16.12 million. The Group’s net debt position has decreased to $50.25 million as at 31 January 2021 as compared to $145.978 million at the end of FY20. The reduction in net debt position was primarily due to sale and leaseback transactions, offset by the continuous capital investment and higher working capital. Net assets of the company at the end of the period came in at $534.91 million, up from $476.74 million at the end of FY20. Net cash inflow for the period stood at $12.47 million in FY21. In FY21, the company paid a final dividend of 1.0 cent per share and is further targeting a dividend payout ratio of a minimum 70% of Underlying NPAT.

In FY21, the gross margin and net margin of the company stood at 9.9% and 1.7%, higher than the year-ago figure of 9.4% and -0.3%, respectively. The company’s debt-to-equity ratio in FY21 stood at 0.40x, lower than the year-ago figure of 0.63x.

Profitability and Liquidity Profile; Analysis by Kalkine Group 

Key Update: Recently, the company informed the market that Vanguard Group (The Vanguard Group, Inc. and its controlled entities) has ceased to be a substantial holder of the company from 21 May 2021.

Top 10 Shareholders: The top 10 shareholders together form around 40.43% of the total shareholdings, while the top 4 constitutes the maximum holding. Allan Gray Australia Pty Ltd and Paradice Investment Management Pty. Ltd. are holding a maximum stake in the company at 9.13% and 9.09%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Key Risks: The company is exposed to several operational risks that may materially impact operations or results of the company’s business. These risks include industrial action, workplace health and safety, and the loss of essential infrastructure. Further, regulatory reforms and government initiatives over PBS and CSO could risk the structural and operating environment. Further, the company’s medication management business, i.e., Medication Packaging Systems (MPS), was adversely impacted by the Covid-19 virus outbreak in FY21, which add to the woes. Also, stiff competition from peers and an increase in research and development expenses may weigh on the financial results of the company, going forward.

Outlook: The company drives organic growth from the existing core business and remains on track to expand the services through an innovative approach. It expects to continue its growth momentum in FY22 and is planning for a CAGR of more than 10% for the next two years and achieve $100 million in underlying EBITDA by FY23. Although, the company has witnessed continued softness in the FMCG market, it, however, expects a steady recovery in 2HFY22. In addition, pursuing M&A activities along with a robust research and development (R&D) pipeline, SIG remains well-placed for long-term growth.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of the company has corrected by ~11.03% in the past three months. Currently, the stock has a 52-week’s high and low levels of $0.74 and $0.507, respectively. We have valued the stock using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at slight premium as compared to its peer median, considering the decent financial performance, expected sales growth and increase in EBITDA of the company. For this purpose, we have taken peers Cochlear Ltd (ASX: COH), Australian Pharmaceutical Industries Ltd (ASX: API), to name a few, which comes under healthcare equipment & services sector. Considering the robust financial performance in FY21, growth in pharmacy sales, reduction in net debt, decent long-term outlook, decent contribution from its own retail brands, and key risks associated with the business (as stated above), we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.595, down by ~0.834% as on 30 June 2021.

SIG Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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