Sigma’s result announced today was a solid result. Due to management’s pre-announcement of the improved performance of Discount Drug Stores and Central Healthcare Solutions on 10 August, the sales revenue was largely in line with market expectations.
These acquisitions provided an above initial expectation contribution to the group and were responsible for a one-off accounting adjustment due to the requirement to pay an additional contingent consideration due to the improved performance of this business.
NPAT was impacted by the decline in margins due to the PBS price reform. While these reductions were anticipated, Sigma was able to maintain a gross margin of 7.4% through a broadening of the revenue base. The decline in the EBIT/Sales margin to 1.93%, however, is concerning. Stripping out the one-off items, however, the underlying EBIT/Sales margin was a more respectable 2.46%. Improving margins above this rate will be a key to the success of the business in the year ahead. With administration costs increasing 12.3% for the half, it will be imperative for management to contain expenses in the lower revenue environment that pharmacies are currently enduring.
Looking forward, Sigma seems to be well placed to continue to gain economies of scale and efficiencies from the nationwide network and their growing stable of brands. With increased contributions from recent acquisitions, profitability will likely improve over the year ahead. Management is committed to improving the supply chain, and is undergoing development plans for the improvement of the distribution facilities in SE Queensland and Sydney. With these improved efficiencies, Sigma has the potential to seek more partnerships with more members and also has the potential for further acquisitions.
Sigma Pharmaceutical Results, 10 September 2015
Comment by David Lane, director of Wealth Management at Pitcher Partners