The Defensive Proposition Of Sigma Healthcare

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This story features SIGMA HEALTHCARE LIMITED, and other companies.
For more info SHARE ANALYSIS: SIG
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

In a turbulent market, Sigma Healthcare could prove a defensive alternative driven by Chemist Warehouse’s value offering and the company’s international growth.

• Sigma Healthcare's solid first half overshadowed by war in the Middle East
• Chemist Warehouse a defensive retail business
• Store numbers growing in New Zealand, Ireland and the UAE
• Analysts are net positive in the current environment

By Greg Peel

At the end of February, Sigma Healthcare ((SIG)) posted a first half FY26 result which was generally seen as very solid, albeit in line with consensus expectations.

Underlying earnings rose 18.7% year on year, revenue was up 14.9%, Chemist Warehouse (CW) like-for-like sales rose 15.0%, and international like-for-like sales were up 11.1%.

Twelve new stores were added internationally (New Zealand, Ireland, UAE), taking the total to 97.

Analysts stated the result underscored the strength of the merged group and the scalability of its integrated healthcare model. The standout driver was the continued expansion and performance of the CW network.

Australian CW-branded store sales growth reflected the appeal of the CW value proposition, strong customer engagement and benefits of GLP-1 uptake.

Valuation was the problem, for some. Despite the solid result, Morgans downgraded to Accumulate from Buy while Macquarie, Citi and Bell Potter stuck with Hold or equivalent ratings. UBS and Morgan Stanley retained their Buy-equivalent ratings.

Sigma’s share price has fallen ever since, but through no fault of the company itself. Sigma reported its result on February 27. On February 28, Trump bombed Iran.

Defensive

The ongoing impact of the war on the Australian market in general remains unclear in the ever-changing landscape. As I write, the ASX200 is down over -1%, again, and oil prices are continuing to rise.

Earlier this month, Ord Minnett published a report noting the broker continues to see Australian Healthcare as a key defensive exposure against a backdrop of volatile global markets, riven by geopolitical tensions, supply-chain disruptions and other macro pressures.

Ord Minnett’s key picks are Regis Healthcare ((REG)), Integral Diagnostics ((IDX)) and Sigma Healthcare, highlighting Sigma’s multiple growth levers and high incremental margins.

On Monday morning, RBC Capital noted Sigma is Australia’s largest pharmacy franchisor and full-line pharmaceutical wholesaler. CW is a “category killer”, RBC suggests, with a market-leading retail network, supported by a national wholesale and distribution platform.

Sigma’s above-market growth is underpinned by tailwinds in the health & beauty market. The pharmaceutical, cosmetic and toiletry goods retail segments rose 8.5% in FY25. Increased focus on health and beauty and an ageing population should continue to drive outsized category growth over the medium-term, in RBC’s view.

RBC believes CW’s position as a value disruptor with an aggressive lowest price guarantee positions it well to take share, particularly with value-conscious consumers and constrained household budgets following back-to-back rate hikes and a circa 30% increase in fuel prices (to date).

While soaring fuel prices may drive consumers to seek the lowest prices, Ord Minnett sees the pharmaceutical wholesalers, including Sigma, and the pathology providers as most exposed to higher fuel prices and ongoing supply disruptions.

The broker notes these businesses have freight and logistics operations (eg medicine supply, sample transportation) that suggest a limited ability to pass on input costs near-term.

Ord Minnett also took the opportunity to lower sector target prices due to rising capital costs as the Australian ten-year bond yield rises, including the impact of two RBA rate hikes.

Solid Growth

It is RBC Capital’s view Sigma offers the combination of

1) market leading, vertically integrated scale in a growing, defensive industry, driving an unbeatable domestic value proposition,

2) attractive, capital-light unit growth profile driving strong incremental return on invested capital uplift,

3) margin growth drivers including $100m synergies post the CW merger by FY29, operating leverage, private label penetration and improved supplier terms.

These factors drive RBC’s forecast earnings compound annual growth rate of 14.8% over FY25-28.

Aside from the value proposition of CW, RBC highlights Sigma’s international growth potential. Since entering the New Zealand market in November 2017, Sigma has added an average of nine stores per year to FY25, reaching more than $1bn in network sales, with scope to continue growing.

The company is seeking to replicate this success offshore in Ireland and Dubai. These markets are currently very early stage, and RBC notes the presence of well capitalised competitors with established brand recognition.

Australian like-for-like sales have outperformed international since the first half FY25, and the associated 17% growth in general and administrative expenses in the first half FY26 highlights some of the potential costs associated with an international expansion.

To that end, while the domestic growth setup is promising, the very early stage nature of the international segment (ex-New Zealand), related party risks, and elevated valuation drive RBC Capital to initiate coverage of Sigma Healthcare with a Sector Perform rating.

Ord Minnett, meanwhile, has upgraded its rating to Buy from Accumulate.

Morgans sits on Accumulate, which is one rung below Buy on its five-tier rating systems. However, for the purpose of a simple Buy-Hold-Sell scale, FNArena aggregates Accumulate as Buy.

On that basis, of the seven brokers monitored by FNArena covering Sigma Healthcare, four have Buy or equivalent ratings and three have Holds.

The consensus price target among these brokers is $3.23.

Outside of daily monitoring, Jarden upgraded to Buy post the release of interim financials, with a price target of $3.60.

RBC’s Sector Perform rating comes with a target of only $2.50.

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