Sigma Healthcare’s Four Pillars Of Growth

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Sigma Healthcare’s transformational merger with Chemist Warehouse provides for strong growth in sales, earnings, synergies and store-count in FY26 and beyond.

-Sigma Healthcare’s FY25 sales boosted by Chemist Warehouse
-Store-count and synergies grow
-Management eyes four pillars for continued strong growth
-Valuation remains a sticky point

By Greg Peel

Leading pharmaceutical retailer Sigma Healthcare ((SIG)) has been around for 112 years in various guises, but arguably its most significant development was February’s merger with (reverse takeover by) the mighty Chemist Warehouse Group, adding to existing Amcal, Discount Drug Stores, Ultra Beauty and PriceSave chains.

This week Sigma reported its maiden FY25 result as a merged entity with Chemist Warehouse which represents a full twelve months’ contribution from Chemist Warehouse and four and a half months of Sigma.

Normalised earnings of $834.5m were slightly below consensus at $846m. Sales were up 82%, with highlights for Morgans including like-for-like store growth of 11.3% across the Chemist Warehouse network, total retail sales growth of 14% and a material increase in synergy benefits.

During the period, Sigma opened 35 stores (18 in Australia, 17 internationally).

The most important insight from the result for Macquarie was the business model metrics of the combined group, with a gross profit margin of 24.1%, cost of doing business representing 10.1% of revenue and a resultant earnings margin of 13.9%.

The group is highly cash generative, Macquarie notes, with operating cash flows in excess of $0.5bn and cash conversion of 83%.

Closing net debt of $752m was -$550m below Bell Potter’s expectation based on the guidance range in the merger documents. This has a material impact on FY26 earnings per share growth and overall equity valuation.

Looking Ahead

Sigma did not provide specific guidance for FY26 revenues or earnings.

Citi was encouraged double-digit like-for-like sales in the Chemist Warehouse network has continued into the first half FY26. The broker’s earlier work has shown Chemist Warehouse pricing is comparable to Amazon and around -13-14% cheaper than Coles Group ((COL)) and Woolworths Group ((WOW)) on a comparable product sample set.

This low-price positioning underpins further market share gains to drive sales, together with the high growth of the pharmaceutical category (GLP-1s, prescription medicines etc). Citi increases its FY26 Chemist Warehouse Australian Network like-for-like growth forecast to 10% from 8%.

Sigma’s earnings are expected to double between 2025-28 as the company exploits organic and international growth opportunities, Macquarie notes. Domestic store growth of 6%, new product developments in own or exclusive private label (less than 10% in FY25) and synergies through scale (now $100m, previously $60m) are important components of Sigma’s “four pillars of growth”.

Guidance for synergy cost-out savings were upgraded from $60m annually to $100m over four years with the majority of these to be realised in FY28/FY29. The key obstacle to faster capture of the synergies, notes Bell Potter, is the seamless consolidation of essential systems for ordering, warehousing and logistics. Each of the businesses has complex systems driving these functions. Their replacement and consolidation is timely and expensive.

Sigma’s marketing and media strategies are built around a highly visible media property, Macquarie notes. Chemist Warehouse will lead the market in implementing new strategies such as Chemist Warehouse partnering with Snapchat to promote its “Mayhem” sale using the app’s new advertising format, First Snap (the target customers are Gen Z).

The outlook commentary paints a positive picture which sees Morgans forecasting earnings growth greater than 30% in FY26. Morgans has upgraded near-term forecasts modestly and increased like-for-like growth and updated synergy benefit forecasts.

Chemist Warehouse’s Australian store portfolio is significantly overweight Victoria, Citi notes, reflecting its formation. Should Chemist Warehouse’s store density (measured by population) in Victoria be matched in other states, we could see the Australian store network reaching around 830 over the next decade (300 more stores than in FY25).

New store opportunities should likely continue to emerge, Citi believes, as older, independent pharmacists retire from the industry. Over FY26-FY30, Citi forecasts an average of 25 net new stores per annum in Australia and 16 stores per annum in the international businesses.

Mixed Views

Sigma’s transformational agreement to merge with Chemist Warehouse created a leading healthcare wholesaler, distributor, and retail pharmacy franchisor, Morgans notes. This broker upgrades to Accumulate from Hold.

Morgan Stanley remains Overweight.

Strong companies demand premiums, Macquarie declares, but with Sigma trading on a FY26 PE of 48x, investors will be wondering just how “moaty” the business is. It would appear scale and cost advantage are the key to differentiation from rivals. These are hard to replicate. The unknown, insists Macquarie, is moat duration.

Sigma continues to deliver on its growth strategy, with a market-leading offer, and strong execution across the top-line and bottom-line. However, on that 48x, Macquarie sees valuation as stretched, and retains Underperform.

Earnings conviction will likely be key to calling the stock given the high multiple, Citi suggests. This broker waits to see a proper consensus post the financial year end adjustment to assess what’s built into market expectations before becoming more constructive, and retains a Neutral rating.

On Sigma’s much lower than expected net debt, and subsequent interest cost savings, Bell Potter upgrades to Hold from Sell.

Jarden is sticking with its Overweight rating and a price target of $3.40 (increased by 10c). This analyst sees this week’s result as delivering more evidence why Sigma shares deserve to trade at a premium multiple.

Key characteristics highlighted are the retailer is highly cash-generative, it is growing market share, has significant operating leverage and a global growth story. To add to the thesis, the shares are seen trading at the lower end of its industrial peer set on PEG ratio.

Note: PEG Ratio is P/E divided by expected EPS growth (in %).

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