The Sigma Healthcare Ltd (ASX: SIG) share price has climbed higher this morning following a trading update.
In early trade the pharmacy chain operator and supplier's shares are up 3.5% to 91 cents.
What was the update?
This morning Sigma announced that it has agreed to an amendment to its Community Service Obligation (CSO) Deed that will result in an additional $5.2 million of funding.
This amendment has been made to reflect the Federal Government's budget commitment to provide compensation to CSO wholesalers in order to offset the impact of the funding arrangement it has agreed with Medicines Australia.
All in all, management expects total compensation of $15 million will be shared by CSO wholesalers. This will be shared out based on relevant CSO market share over the past 2 years.
Sigma expects to recognise the funds it receives between now and June 2020, in line with the corresponding impact from the Government's new agreement with Medicines Australia.
Should you invest?
Despite this positive news and its shares being down 31% since the start of the year, I still think that Sigma is best avoided.
Sigma's shares have come under significant selling pressure this year since it revealed that it was taking legal action against The My Chemist/Chemist Warehouse Group.
The action relates to the group's plan to source certain products from a different supplier. Asides from legal costs, management believes that if MC/CW goes ahead with its plan, it will impact Sigma's earnings before interest and tax by between $5 million and $10 million per year.
This is approximately 5.5% and 11% of its most recent full-year EBIT by my calculation.
But perhaps worst of all is that its contract with MC/CW expires in 2019. I feel it is unlikely to be renewed following this legal action. This could lead a sizeable gap in its future earnings.
In light of this, I would avoid Sigma and consider rival Australian Pharmaceutical Industries Ltd (ASX: API) instead.
