Is there a bit of a growth story emerging from pharmacy wholesaler, Sigma Pharmaceuticals (SIP)?
At first glance, the answer would be a ‘no’ looking at the weak full year result for the year to January 31 (once it was stripped of a lot of one off items).
And, going on comments about how tough it is in pharmaceuticals because of the impact of government reform on the prices of prescription medicines, which has slowed growth, the answer would again be ‘no’.
But the company, which came close to corporate death several years ago, must see growth in the offing because it says it is going to invest heavily revamping its distribution and logistics networks in the next few years.
The upgrade will lower costs, but companies also don’t invest without a reasonable idea the money spent will generate improved sales growth and higher profits.
Judging by the solid market reception yesterday, investors liked the news, even if news that dividends this year won’t be franked could take the edge of the new appreciation in the market for Sigma.
The shares rose more than 3% to 65 cents on a day where the wider market was weak for all the session.
That was after a rise of 3.3% in Wednesday’s much stronger market, after it revealed the purchase of a smaller rival.
The performance of the shares yesterday is also in contrast to the near 20% slide in the shares in the past year up to the start of this week.
The 6% plus rise in the past two days is quite a rally for Sigma shares. It came after smaller falls earlier in the week and a drop of 3.9% a week ago yesterday.
SIP 1Y – Sigma to expand revamp despite weak sales growth
Sigma says it will upgrade its key distribution centres over the next three years, while the company, which operates the Amcal, Amcal Max and Guardian pharmacy brands, also indicated that its investment in merchandising, marketing and multi-channel sales capability was largely complete.
"In the coming three years, a capital expenditure program of upgrading key distribution centres to drive further operational efficiencies will occur," the company said yesterday’s statement which accompanied the annual result.
"The first site in which this is currently being planned is our Brisbane distribution centre," the company said.
Despite a slight miss on sales, which rose 1.1% to $2.97 billion in the 12 months ended January 31, (analysts forecast a touch over $3 billion for the year), the company expects to see sales growth rise this year at a rate a bit faster than the pricing of the Pharmaceutical benefits Scheme will allow.
Government changes to the pricing in the scheme were blamed for the less than expected sales growth in 2013-14.
"This impact is expected to continue in the year ahead, with the next round of Government price disclosure changes occurring in April 2014," the company said yesterday. So to get higher growth, Sigma is going to have to do something at the retail end of its chain to push sales higher.
Its distribution and warehousing end of the supply chain will be undergoing several years of renovation and upgrading, according to yesterday’s statement.
And while Sigma’s full year net profit more than doubled, that impressive outcome was due to a number of one off events and not higher profit margins.
Net profit jumped 187% to $53.5 million, while earnings before interest and tax rose 204% to $70.3 million. Analysts had expected a net profit of around $47.6 million.
The 2013-14 outcomes were inflated by a higher than expected profit of $10.9 million on the sale of a warehouse property in Clayton, in Melbourne, which helped offset the writing down of bad debts worth $7.4 million from the collapse of a chain of pharmacies and the writing off of $3.7 million from a litigation settlement.
Underlying EBIT was $71.2 million, the net profit after tax was just over $51 million. Both were up on the previous year’s figures.
The company said it had $67 million in cash at the end of the financial year and no debt.
That rise on Wednesday was helped by the news that Sigma had purchased smaller rival Central Healthcare for $24.5 million, which will lift the company’s market share.
The company announced a fully franked final dividend of 2¢ a share, payable on April 30. That takes the total for the year to 4c a share, but exhausts Sigma;s franking reserve.
The company says it will almost certainly pay unfranked dividends in 2014-15, which will decrease its attraction to investors.
