The backstory is that Sigma Pharmaceuticals, which was already listed, has merged with Chemist Warehouse. Officially, Sigma is acquiring Chemist Warehouse. But in reality, it’s a reverse takeover of Sigma by Chemist Warehouse, the shareholders and franchisors of which own 85.75% of the merged entity, Sigma Healthcare.
Let’s take a look at the two parties.
Established in 1912, Sigma is a wholesale distributor of pharmaceutical goods and medical consumables in Australia and also operates pharmacies including branded pharmacies under the Amcal, Discount Drug Stores and PharmaSave brands. It also provides retail support services to its branded network of pharmacy members; dose administration aid services; technology and data analytics solutions; and logistics services to pharmaceutical manufacturers and other supplier partners.
Sigma sells wholesale to more than 3,500 pharmacies, including 313 franchisees operating under the Amcal and Discount Drug Stores pharmacy brands. Its franchise network comprises 209 Amcal pharmacies, 104 Discount Drug Stores pharmacies and 37 PharmaSave stores. Sigma operates eight distribution centres across Australia.
Chemist Warehouse is a leading Australian retail pharmacy franchisor and owns the Chemist Warehouse and My Chemist pharmacy franchise brands. Chemist Warehouse is the largest pharmacy retail player in Australia, supporting 567 franchised retail pharmacies in Australia, comprising Chemist Warehouse stores (517), My Chemist (21) and Pipeline (29). Chemist Warehouse also operates the Ultra Beauty, My Beauty Spot and Optometrist Warehouse brands. Chemist Warehouse partly owns 50 retail pharmacies in New Zealand, ten retail pharmacies in Ireland and one retail pharmacy in Dubai and operates a further ten retail stores in China through services agreements with local companies.
The merger forms an industry giant that controls 16%, or 950, of the nation’s pharmacies, across four core brands: Chemist Warehouse, My Chemist, Amcal and Discount Drug Stores. The merged entity will have multiple options for growth, including increasing its store network in Australia, extending the reach of the Chemist Warehouse brand into international markets, and expanding the range of owned, private label and exclusive brands to provide franchisees, independent pharmacies and consumers with greater choice and value for money.
When it began trading last Thursday, the merged entity became the 27th largest stock on the share market, with a market capitalisation of about $31.8 billion, according to the ASX, up from $4.9 billion for Sigma Healthcare on its own. Sigma Healthcare shares initially opened 0.7 per cent higher, and at one point SIG was up 9.4 per cent at an intra-day high of $3.02, before retracing to close the day at $2.91, up 15 cents, or 5.4 per cent.
On Friday, Sigma Healthcare surged 21 cents, or 7.2%, to close at $3.12.
There was plenty of enthusiasm for the stock, following the release on January 28 of a buoyant update from Chemist Warehouse, which sent the share price of Sigma Healthcare (the pre-merger entity) up 12%, to $3.02. At that price, SIG had risen 6.7 times in three years.
Chemist Warehouse updated the market on its performance during the first half of FY25, the six months to 31 December 2024. Chemist Warehouse delivered a 13% increase in total sales to a record of $5.15 billion, on the back of same-store sales growth of 10.3%, and the opening of 19 new stores, including two new stores in Dubai.
Pre-tax profit grew at a faster rate than sales, on the back of margin expansion. The company reported a 400 basis points (that is, 4 percentage points) increase in its earnings before interest and tax (EBIT) margin, to 22.3%. This powered a 36.1% increase in pre-tax profit compared to the prior corresponding period, to $436.8 million.
That upgrade from the Chemist Warehouse chunk of the soon-to-be-merged entity was followed on February 7 by an update from the Sigma Healthcare business, which improved its full-year normalised EBIT guidance range for the year ending 31 January 2025 to $64 million–$70 million, from the previous guidance of $50 million–$60 million issued last September (the new merged entity will ditch Sigma’s existing financial year-end balance date of 31 January, and change to a 30 June full-year balance date.) The company said the upgrade was due to improved operational performance, including the “strong execution” of the new Chemist Warehouse supply contract that commenced on 1 July 2024. Sigma Healthcare also said its FY25 statutory net profit after tax would be significantly impacted by non-recurring merger costs.
The combination of Chemist Warehouse’s retailing power with Sigma’s distribution infrastructure gives you a retail network of more than 1,000 stores and 16 distribution centres, and huge competitive advantage in the form of buying power, economies of scale, and vertical integration. Sigma estimates annualised synergies of about $60 million, which is about 12% of current combined group EBIT.
Analysts say there is plenty to like about the stock – but the market has run well ahead of them.
Citi, for example, has revised its earnings forecasts for the merged group, expecting EBIT to grow at a compound annual growth rate (CAGR) of 24%, with “ample room for further market share gains,” particularly from supermarkets. Citi says margins are also likely to further expand on merger synergies and operating leverage, and it says SIG has “material scope for market share gains in Australia,” particularly from supermarkets, given the merged group has only about 26% of the pharmacy market by revenue. The broker says SIG has a “superior earnings growth outlook relative to other retail peers” – but it has a target price on the stock of $2.90.
Morgans says the share price of SIG will be volatile over coming weeks, with possible CWG shareholder selling offset by potential buying both from institutions and investors. From the first day of trading, SIG was reweighted in the S&P/ASX 200 and S&P/ASX 300 indices, and Morgans estimates passive index funds will need to acquire about an additional 230 million shares ($655 million worth). Then, at the March rebalance, the broker expects SIG will be large enough for both the S&P/ASX 100 and S&P/ASX 50 indices (depending on vacancies): should it be included, Morgans expects passive-investor demand for about another 100 million shares ($280 million worth). “Additionally, over time, SIG is likely to be eligible for inclusion in other global indices (MSCI and FTSE), driving demand for a similar number for shares from index funds,” says Morgans. But its price target is $3.00.
Macquarie says store rollouts “remain a significant opportunity,” and the company’s “operational performance is best-in-class domestically.” The broker expects EBIT to grow at a compound annual growth rate (CAGR) of about 38% for the next three years. But at $3.12, SIG is already trading 44 cents, or 16.4%, above Macquarie’s current target price of $2.68.
Stock Doctor/Refinitiv collates the views of six analysts on Sigma Healthcare and arrives at a consensus target price of $2.68.
The analysts project a dividend yield of 0.5%, 25% franked (grossed-up, 0.6%) in FY25, rising to 1.1% in FY26, 25% franked (grossed-up, 1.2%). That is not likely to excite income-oriented investors, but it is better than nothing.
The merged Sigma Healthcare, containing the Chemist Warehouse behemoth, is an outstanding business that has big opportunities – including taking the namesake Chemist Warehouse brand global – but right now, analysts think it is over-valued. But there is always the possibility that the analysts’ target prices will be upgraded.
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