Sigma guides to yet lower earnings and weaker sales

Revelations that pharmacy wholesaler Sigma Healthcare (SIG) had slashed its underlying earnings expectations for the FY22, met with instant market disapproval, with the share price down around -7% lower in late trade.

In its first half result, Sigma downgraded guidance due to the lingering nature of the pandemic, and lowered earnings growth expectations in FY22 to 5% instead of 10%.

In the wake of dropping its indicative bid for rival Australian Pharmaceutical Industries (API), the company revealed that with 10 months of the financial year now complete, it anticipates the decline in underlying earnings to reach a double-digit percentage. 

Sigma now anticipates FY22 underlying earnings to be down around -10% versus FY21.

The company was also quick to flag the ongoing negative impact on sales into the new financial year as it comes to grips with the implementation of a new Enterprise Resource Planning (ERP) system.

Interim chief financial officer Jeff Sells noted, while the company reached go-live on this project broadly on budget and on time, additional challenges experienced through the height of covid had a significant impact on customers. 

“Unfortunately, the combination of these factors in the second half of FY22 have materially impacted sales and resulted in an unexpected increase in operating costs through the transition.”

Sigma, whose financial year ends on January 31 also flagged that one-off and non-operating costs are also likely to be higher at around $25-$30 million. 

As a result of all these outcomes – which were compounded further by protracted impacts from covid - management noted that the peak net debt will be commensurately impacted.

Despite recent setbacks, Chairman Ray Gunston is confident in the future growth profile for Sigma. He cites the recently approved extension to its new Victorian Distribution Centre in Truganina as a promising development. 

“This will see $20m invested to double existing capacity to 40,000 square metres to accommodate the growth pipeline ahead,” Gunston said.

The extension is expected to be completed over the next 18 months.

“Sigma has undertaken an extensive transformation program over the past four years that put the company on a strong footing for our incoming CEO Vikesh Rams to execute our strategy, focusing on actions to accelerate our long-term growth and improve margins.”

Sigma is expected to announce its FY22 results on March 29, 2022.

Consensus recommendation is Moderate Buy, and the stock is trading at a significant discount (33%) to Morningstar fair value of 74 cents.