Pharmaceutical products supplier and retailer Sigma Pharmaceutical Limited (ASX: SIP) has defied critics to deliver a better-than-expected full year result that is further sweetened by a special dividend.
Sigma's share price jumped over 2%, or 2 cents, to 88 cents in early trade even though no brokers polled by Reuters , bar one, think the stock is worth buying at these levels.
But Sigma is proof that valuations alone shouldn't be a determiner of whether to dump a stock, especially one with a strong track record of delivering shareholder value.
The company posted an 11% increase in earnings before interest and tax (EBIT) to $78 million as revenue climbed 5.7% to $3.1 billion for the year ended January 31.
Sales were roughly in line with consensus but EBIT came in around 6% above consensus. The 1 cent a share special dividend above the 2 cent final dividend has also taken many by surprise.
Sigma's Amcal and Guardian branded pharmacies also recorded pleasing results with a 7% like-for-like sales growth in the second half of the financial year.
While management didn't give guidance, its chief executive Mark Hooper noted that the growth momentum is being sustained in the new year.
The recent acquisitions of Central Healthcare Services and Discounted Drug Stores should lift this year's earnings materially.
While Sigma's valuation seems stretched as it is sitting on a 12-month trailing price-earnings (P/E) of 17.3 times, this should fall to around 15 times for the current year.
That's not expensive given the structural nature of the pharmaceutical industry. The pharmacy business is one of the few "cartels" that's allowed to exist in Australia with laws giving protection from competition.
I think Sigma is a "buy" in this environment where investors are willing to pay a premium for greater earnings certainty.
It isn't only Sigma that is doing well with the stock jumping 40% in the past 12 months, its rival Australian Pharmaceutical Industries Ltd (ASX: API) has also been in strong demand with its shares sitting on a 180% capital gain.
