Shares in pharmaceuticals and health products supplier Sigma Healthcare jumped more than 4% yesterday after the company met lowered guidance, revealed a new acquisition and reaffirmed it was on track for higher earnings in the next year.
The shares ended up 2.9% at 88.5 cents as investors acceptance the company’s reassurances that it was back on track after a tough first half.
Sigma lifted its half-year net profit the six months to July 31 by 17.4% to $27.8 million, but sales fell amid challenging industry conditions.
Sales for the half year to July 31 fell 6.1% $2.01 billion, from the same period of 2016-17. Underlying earnings before interest and tax (EBIT) fell 8.7% to $44.2 million.
Underlying EBIT and NPAT excludes the impact of non-operating items, including restructuring costs, due diligence costs and nearly $8 million in litigation settlement expenses.
Sigma said sales were impacted by a pull-back in sales of low-margin Hepatitis C medicines and softer consumer sentiment (and increased competition from the likes of rival chemists chains, such as Chemists’ Warehouse).
Sigma said that adjusting for the lower Hep C sales, sales revenue was down 1.4%.
Sigma confirmed its guidance, provided on August 11, of underlying EBIT of $90 million for the full 2018 fiscal year and CEO, Mark Hooper says a number of factors point to a more positive outlook for fiscal 2019.
“The signs are good that momentum is swinging back in our favour," Mr Hooper said in statement on Thursday.
“This is supported by a combination of our pipeline of pharmacy brand members, service improvements and efficiency gains from Project Renew and the opening of our Berrinba distribution centre in Queensland, along with the ramp-up of new service contracts in hospitals and logistics."
Investors also liked the news that it had agreed to buy dose administration services provider Medication Packaging Systems (MPS) for $18.5 million.
Mr Hooper said the acquisition fits in with the company’s strategy of becoming a broader healthcare company and MPS provided another avenue of growth.
MPS is the country’s largest provider of medication management services to the aged care sector, and to community pharmacies across Australia.
Sigma said yesterday completion of the acquisition is expected to occur on 30 September.
Interim dividend was maintained at 2.5 cents a share, fully franked. The big imponderable is the bad blood between Sigma and major customer the My Chemist/Chemist Warehouse Group.
Whilst it is still some way off, it is possible MC/CW may not renew its supply agreement with Sigma when it expires in June 2019.
This would put a serious dent in its earnings that would be hard to fill. The dispute erupted in May and knocked 28% off the Sigma share price. Sigma went to court and in July announced that its action was ending and that the two parties would talk.
The argument is over a disputed wholesale supply agreement. Sigma started legal action in May after the massive privately-owned My Chemist/Chemist Warehouse Group indicated it was going to source products from another wholesaler.
Sigma, which owns the Amcal and Guardian brands, maintains that My Chemist/Chemist Warehouse Group, under an agreement running to June 2019, is not entitled to acquire products from another wholesaler.
Sigma said in late July that it had entered a formal negotiation to seek a commercial resolution to the dispute.
“If a commercial resolution is not reached the parties have agreed to confidential and binding mediation and arbitration,” Sigma said.
And that remains the biggest issue around the stock and its share price.
