The government announced this week that the rules that restrict new pharmacies from opening near existing pharmacies would be extended for another five years, despite several government-commissioned reviews recommending they be abolished. This also means no pharmacies in supermarkets. Sigma Pharmaceutical Limited (ASX: SIP) should benefit from the decision.
Sigma Pharmaceutical is a leading Australian full line wholesaler and distributor to pharmacies. In addition, Sigma has the largest pharmacy-led network in Australia, with over 1,200 branded and independent pharmacies in its network, including some of Australia's best known pharmacy retail brands in Amcal, Amcal Max, Guardian, Pharmasave, Chemist King and Discount Drug Stores.
There is always an overhang of legislative risk with the pharmacy sector, given the high level of government regulation. However the five-year extension of the current agreement provides some certainty for investors with regard to this risk.
So how does the Sigma Pharmaceutical business stack up from a potential investor's point of view? The company had a significant restructuring and reorganisation of its business about four years ago and as a result is now a much better company.
It is currently trading at around $0.86, which is well off its 52-week high of $1.01.
The price-to-earnings ratio of around 16.5 is certainly not expensive in the current market.
Other metrics are positive too, it has net tangible assets of 43 cents per share. The price-to-sales ratio is 0.3 (the lower the better). The market-to-book value is under 2 at 1.64.
When considering the fundamentals of a company and looking for value it is always encouraging to see a whole range of measures aligning in suggesting the company may be worth investing in. Sigma Pharmaceutical appears to be such a case.
The equity valuation-to-earnings ratio is around 17.8, that is well below the market average of approximately 20.5. Sigma Pharmaceutical also produces healthy free cash flow. My valuation range for the company, based on a discounted cash flow model, is between $1.00 and $1.20 per share.
The company carries very little debt, which is a good thing given the one metric that is a cause for concern with Sigma Pharmaceutical. The operating margin for the business is very low at about 3%. This does mean the business needs to be run very well with low costs and little debt to maintain healthy profit.
The dividend yield for Sigma Pharmaceutical is currently 4% but that reflects the fact that the company chose not to pay an interim dividend in the second half of 2014. It has now reinstated the interim dividend and I would expect the yield this year to be around 6% based on expected dividends of 5 cents per share for the full year.
I believe Sigma Pharmaceutical is well worth considering adding to your portfolio at current prices and I think it offers both growth and income opportunities for investors.
