\n-Brokers uniformly reduced forecasts and valuations
\n-Instead, Chemist Warehouse has negotiated five-year contract with Ebos Group<\/strong><\/p>\n
By Sarah Mills<\/p>\n
The big news – we use the term loosely — yesterday was confirmation of Sigma Healthcare's ((SIG)) loss of the Chemist Warehouse contract after June 30, 2019. The prospect had been well aired but the market had been awaiting evidence.<\/p>\n
The loss of the contract will hit revenue by roughly -40%, which will translate into earnings-per-share. On the upside (again a loose term) about $300m in working capital will be released. Sigma has also had some time to prepare for the news, although not much has been provided by way of guidance.<\/p>\n
Post announcement, stockbrokers UBS, Credit Suisse, Citi and Morgan Stanley uniformly cut earnings-per-share estimates and target prices, but varied in their investment opinions.<\/p>\n
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Falling Valuations, Price Targets<\/strong><\/u><\/p>\n Already bearish on the stock, the news did little to alter UBS’s view. The broker retained its Sell rating, noting Sigma faces a few trading headwinds, likely PBS-related price erosion and continues to trade on a high price-earnings multiple relative to the ASX-200 (ex-resources). UBS' target price falls to 45c from 75c.<\/p>\n Citi, also a former bear, took the opposite tack and upgraded to a Buy from a Sell, noting the share price had already fallen -40%.<\/p>\n The broker cited capital management and acquisitions as key risks given the tightening of Sigma’s financial straps. It cut the target price to 55c from 70c and cut earnings-per-share -15%, -34% and -17% across the FY19 to FY21 reporting period.<\/p>\n Release Of Capital?<\/strong><\/u><\/p>\n Credit Suisse retains its Neutral rating and cut the target price to 52c from 82c. The broker is keeping its gunpowder dry, believing Sigma’s decision on managing the $300m in working capital that will be released at the end of the contract will be critical to the outcome.<\/p>\n The broker suggests astute merger and acquisition activity could result in a higher valuation, but if the money stays on the balance sheet, not so much.<\/p>\n Morgan Stanley retains its underweight rating and believes the stock is now de-risked. But like UBS, it sees a challenging trading environment ahead, which will likely be only modestly mitigated by the capital release. The broker’s target price falls to 43c from 80c.<\/p>\n Now that the dust has settled on the broken relationship with Chemist Warehouse, FNArena's consensus price target has fallen to $0.48 (from $0.76) with Citi carrying the sole Buy rating in the FNArena universe.<\/p>\n The contract to supply pharmaceutical products to Chemist Warehouse represents around 40% of annual revenues for Sigma Healthcare. Those sales will shift to New Zealand-based pharmaceutical distributor Ebos Group which secured a five-year contract worth $1bn annually to replace Sigma.<\/p>\n<\/p>\n