Morningstar | Transfer of Analyst Coverage on Sigma Healthcare
We have transferred analyst coverage of narrow-moat-rated Sigma Healthcare.We maintain our current forecasts and our AUD 0.70 per share fair value estimate. We forecast Sigma's revenue and earnings in fiscal 2020 to be hit by the loss of key customer My Chemist/Chemist Warehouse Group, or MC/CW. Nonetheless, our longer-term revenue growth assumptions are unchanged at around 1.5% per year, reflecting underlying growth of the Pharmaceutical Benefits Scheme, or PBS, from the beginning of fiscal 2020. Shares in Sigma are currently trading around 9% below our intrinsic assessment.
After adjusting for loss of estimated MC/CW revenue, which currently accounts for around 40% of Sigma's revenue base, and incorporating management guidance for the next two years, we forecast group normalised net profit after tax, or NPAT, of AUD 49 million and AUD 30 million for fiscal 2019 and fiscal 2020, respectively, down from AUD 60 million in fiscal 2018.
Despite Sigma operating in a highly competitive and relatively mature industry, efficiency gains delivered by management's cost and revenue initiatives have been encouraging. We forecast operating margin to increase from an estimated 1.8% in fiscal 2019 to 3.6% by the end of fiscal 2023, given the absence of low-margin MC/CW revenue, improving operating efficiency, and the growing contribution of non-PBS-related service revenue.
The ongoing and negative financial impact of the PBS price-disclosure initiative, coupled with increased competition from generics, and the potential for major pharmaceutical companies distributing directly to pharmacies outside of the regulated wholesale system remain risks to Sigma's earnings growth. Our EPS forecasts project a five-year CAGR of just 1.2%.
Sigma Healthcare is a pharmaceutical wholesale and distribution business in Australia, delivering to pharmacies Australia wide.Co.'s pharmacy-led network includes over 700 retail brand members representing the brands Amcal, Guardian, PharmaSave, Chemist King and Discount Drugstores. Co. also manages and promotes a range of Over the Counter private label products made available to brand member customers, as well as a generic range of private label products under the Pharmacy Care range. In addition, Co., through its subsidiary, Central Healthcare Services, has a presence in the hospital pharmaceutical distribution market.
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