Australia | Sep 23 2008
By Chris Shaw
Having guided to a full year profit result of around $83 million for FY09, it now appears Sigma Pharmaceuticals ((SIP)) has its work cut out for it, as the company yesterday announced a first half result of just $32.1 million, which as UBS points out is only 37% of its full year number.
In the broker’s view, this makes achieving full year guidance somewhat of an ambitious target, a view shared by a number of others in the market such as Merrill Lynch and JP Morgan. Little surprise then the FNArena database shows the stock scoring nothing higher than a Hold rating (six brokers), while four brokers consider the stock a Sell at current levels.
In the view of JP Morgan, the issue is it cannot identify enough earnings drivers to allow the company to meet guidance this year, while earnings risk in future years also appears to be to the downside. As well, for any significant improvement in earnings the broker takes the view it will require an improvement in industry conditions also, as the proposed moves by management to reduce working capital requirements and improve returns on issued capital will not be enough by themselves to lift earnings substantially.
On the broker’s numbers, earnings in FY09 are likely to now be somewhere around $77 million, which compares to guidance of $83-$88 million. As a result, it sees the stock as expensive at current levels given the poor earnings outlook, as it estimates the shares are currently at a 12% premium to the S&P/ASX200 index.
Merrill Lynch agrees with JP Morgan’s assessment, suggesting even if the company uses a couple of its aces such as a sale of the Herron business and low cost ingredient sourcing with offshore providers, the best it can do will be to meet the lower end of guidance. So with little chance of any outperformance compared to expectations, the broker retains its Underweight rating.
In earnings per share (EPS) terms, JP Morgan now is forecasting normalised earnings of 9.2c this year and 11.5c in FY10, while Merrill Lynch is at 9.7c and 11c respectively and the FNArena database shows consensus EPS forecasts of 10.4c in FY09 and 11.4c in FY10.
One issue for Citi is the fact pharmacy inventories appear low and this is likely to have an impact on company revenues in coming months, though it continues to give management the benefit of the doubt with respect to meeting full year guidance and as a result the broker retains its Hold rating.
Post the profit result, UBS has actually upgraded the stock to a Hold, suggesting there has been and should continue to be a takeover premium built into the share price, while acknowledging its previous break-up valuation was too conservative with respect to what the generics business is worth to a new entrant into the marketplace.
On its revised numbers, UBS has lifted its valuation to $1.43 from $1.14 and it sets its price target at that level, while the average price target according to the FNArena database is now $1.32, up from $1.26 prior to the profit result.
Today, Sigma shares are down and as at 12.00pm the stock was 5% or 7c lower at $1.32, which compares to a trading range over the past year of 83.5c to $1.71.