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Morningstar | Sigma Delivers Interim in Line with Guidance and our Expectations; FVE of AUD 0.70 Unchanged

Narrow-moat Sigma Healthcare is set to face substantial revenue and earnings declines in fiscal 2020, following the previously announced contract loss of key customer My Chemist/Chemist Warehouse Group, or MC/CW. Nonetheless, we believe this outlook is fully priced into shares, and with first-half results that tracked our expectations, we maintain our fair value estimate of AUD 0.70 per share.

Sigma delivered half-year underlying EBIT of AUD 34.1 million, down 23% on the previous corresponding period, or pcp, due to softer trading conditions in May and June, and higher-than-expected June Pharmaceutical Benefits Scheme, or PBS, price adjustments. Meanwhile, reported net profit of AUD 13.8 million halved compared with a year ago, largely attributable to inflated business restructuring costs. The declared interim DPS of AUD 1.5 cents per share was down 40% from AUD 2.5 cents per share on the prior period, but represented a healthy 80% payout ratio.

Our fiscal 2019 underlying EBIT forecast of AUD 75 million is in line with unchanged management guidance, implying a stronger second half with improved seasonality and operational efficiency, primarily in expenses related to warehousing and delivery expenses. Similarly, our fiscal 2020 forecast of AUD 47 million sits within the guidance range of AUD 40 million to AUD 50 million. After adjusting for loss of estimated Chemist Warehouse revenue, and incorporating management guidance for the next two years, we forecast group earnings of AUD 49 million and AUD 30 million for fiscal 2019 and fiscal 2020, respectively.

In July we lowered our fair value for Sigma to AUD 0.70 from AUD 0.95 to reflect the loss of contract renewal with MW/CW, commencing from fiscal 2020. The materiality of the impact to Sigma is reflected in around 40% of Sigma's fiscal 2018 group revenue being composed of MC/CW's business, representing around 400 stores of the 2,000 pharmacies serviced by Sigma.

Nonetheless, our longer-term revenue growth assumptions remain unchanged at around 1.5% per year, reflecting underlying growth of the PBS from beginning of fiscal 2020. This is higher than the 2% decline in top line sales in the first half, but the period's performance was negatively impacted by lower demand for Hepatitis C medication. Excluding Hepatitis C, group sales revenue was up 3.2% to AUD 1.82 billion year on year, largely driven by growth in Sigma Hospitals and sales from acquired Medical Industries Australia.