Treasure Chest | Jul 26 2012
By Greg Peel
When investing in listed companies which are beholden to government policy, one must be prepared for the worst. Pharma companies come under the heading of Healthcare and as such should be considered “defensive” under normal circumstances, however anyone who's played the pharma market in Australia these past years will well know that one little change to the PBS or some other government rebate etc policy can render such stocks anything but defensive.
The government, as we also know, is in spending cut mode.
Policy uncertainty surrounding the government's PBS intentions and its capacity to push them through parliament, offset with more than one broker's expectation of some form of capital management ahead, leaves the FNArena broker database pretty well split. Before today, SIP attracted one Buy, four Holds and two Sells.
Having said that, Sigma Pharmaceuticals ((SIP)) is currently offering a fully franked yield of around 7% with projected earnings growth in the low-to-mid single digits. The Citi analysts consider a 12-month forward PE of 12x to be appropriate. Modest market growth and cost initiatives should see projections achieved.
A recovery in Sigma's market growth, or market share gains, would provide upside, Citi notes. But there is also the matter of around $113m in net cash sitting on the balance sheet. Given Sigma will continue to generate cashflow from operations, Citi suggests this cash is “entirely excess”, even after the company has paid its ordinary dividends. The company has declared a return on invested capital (ROIC) focus, so Citi believes the board will want to give this excess back to shareholders.
Which means the potential for a special dividend. Citi is now factoring in a 2.5cps unfranked special dividend every half year for the next two years. The payout will be spread out so as to provide a reasonable return while retaining some flexibility, in case. Paying out the cash means less interest income so a resultant trimming of earnings forecasts follows. But Sigma will be paying around a 16% yield in FY13 and FY14 if Citi is on the money, with franking of 58%.
Despite more than one broker agreeing with Citi to the point some form of capital management is possible, Sigma's current share price does not reflect such an outcome. Citi has thus upgraded its rating to Buy, leaving the B/H/S ratio now at 2/3/2.
Citi's 61c target price sits in the middle of the database pack, which ranges from 50c (UBS; Sell) to 76c (Deutsche Bank; Buy) for a consensus of 63c, or 14% upside from the current price.
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