The company’s audited financial results for FY 2019 show total revenues earned of $3.97 billion and a net profit after tax of $46.3 million.
The company said it continues to maintain a high dividend payout ratio, which currently stands at 101.57.
About Sigma Healthcare Limited (ASX SIG)
Sigma Healthcare is a leading Australian-based pharmaceutical wholesale and distribution business.
The company owns the largest pharmacy network in Australia, with over 1,200 branded and independent stores. Brands include Amcal+, Chemist King, Discount Drug Stores, Guardian and PharmaSave.
Sigma Healthcare also has an expanding presence in hospital pharmacy services.
The company was formerly known as Sigma Pharmaceuticals Limited and changed its name to Sigma Healthcare Limited in May 2017.
It was founded in 1912 and is headquartered in Rowville, Australia.
Why Sigma Healthcare is moving on from Chemist Warehouse
Sigma Healthcare and Chemist Warehouse (CW) agreed last year to terminate their supply agreement and accordingly it will cease with effect from June 30, 2019.
Instead, EBOS Group, a pharmaceutical distributor and pet food company, was awarded a five-year contract to distribute pharmaceutical products to more than 400 Chemist Warehouse and My Chemist stores.
The SIG share price also bounced following the clarification in its presentation today that the terms of the CW contract were prejudicial to Sigma’s commercial interests.
Further, it would have pressured returns to shareholders while the related capital commitments would have restricted future business options.
A key benefit of the breakup would the release of an estimated $300 million in working capital.
On the other hand, Sigma is confident of a strong future ahead as a standalone business.
Sigma clarifies why it rejected the API merger proposal
In December last year, Sigma Healthcare (ASX SIG) received a $726 million takeover bid from Australian Pharmaceutical Industries (API). API had built up a 12.95% stake in Sigma.
Sigma Healthcare rejected the bid and said the offer was undervalued.
In its presentation today, Sigma Healthcare said API’s offer was opportunistic because Sigma Healthcare was highly vulnerable.
Note that the SIG share price had declined substantially after the breakdown in supply arrangements with Chemist Warehouse.
Sigma Healthcare also said today that the merger did not make sense from the point of view of shareholder value because its standalone valuation was far more than API’s offer.
The synergy benefits from the proposed transaction did not outweigh the gap in valuation and instead increased execution risk.
Sigma Healthcare also said that the release of $300 million after the termination of arrangement with Chemist Warehouse would have effectively financed a big chunk of the acquisition price.
Sigma Healthcare repeated its confidence to continue operations as a standalone business given that it had a robust profit outlook and low debt.
Sigma’s strategy moving forward
Sigma Healthcare (ASX SIG) also detailed its strategy and direction following the formulation of a Business Transformation program titled Project Pivot. The project is expected to deliver about 60% of efficiency gains in Year 1, i.e. FY20.
An advanced Capital Expenditure program is in hand amounting to over $220 million, including a brand new ERP system.
Sigma Healthcare expects to substantially complete its CapEx outlay by FY21. The capital investment will entail only minimal debt, estimated to be below $100 million by end FY20.
Business update from Sigma
Comparative sales at brands were up over 4%, and FY20 EBITDA is estimated at $55-$60 million.
Sigma Healthcare (ASX SIG) is managing the transition from the loss of Chemist Warehouse well. Sigma Healthcare’s business focus and strategy appear to be on point.
A takeover bid is usually a validation of the company’s business prospects and the SIG share price looks attractive from this standpoint.
The SIG share price is well off the high of $0.63 it touched in March 2019. At today’s price of 0.54, it provides a great dividend yield of 6.48%.
On the valuation front, Sigma Healthcare (ASX SIG) is priced well below the industry average.
With a decent dividend yield and fair market valuation, Sigma Healthcare Limited is looking attractive.
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