The Sigma Healthcare Ltd (ASX: SIG) share price is heading in the right direction at long last.
In morning trade the pharmacy wholesale and distribution company's shares are up 4% to 86.2 cents, reducing its year-to-date decline to approximately 33%.
Why are its shares higher today?
This morning Sigma advised that a settlement has been reached in relation to its current supply agreement with the My Chemist/Chemist Warehouse Group (MC/CW).
Earlier this year MC/CW advised of its plan to source certain products from a different supplier. Doing so was expected to impact Sigma's EBIT by between $5 million and $10 million per year according to management.
Whilst this was bad, the prospect of MC/CW not renewing its supply contract at all when it expires in 2019 was the real concern for investors. As Sigma's largest customer the loss of this supply contract would leave a huge gap in its earnings, far greater than the initial $5 million to $10 million per year impact.
But things have taken a bit of a positive turn with today's settlement. According to the relase, MC/CW has agreed not to pursue the procurement of products from another wholesaler for the remaining term of the agreement.
As a result, Sigma has reconfirmed its FY 2018 EBIT guidance of $90 million and advised that it expects FY 2019 EBIT to be at a similar level, excluding any benefits from acquisitions or business developments.
Furthermore, Sigma's CEO Mark Hooper has advised that both parties are committed to "a more constructive approach to discussions for a new agreement" for when the current agreement expires.
Should you invest?
While Sigma does look far more secure in the short-term, until the new agreement is signed, sealed, and understood, it will be difficult to judge how Sigma's performance will be impacted from FY 2020 onwards.
Because of this I would sooner invest in industry peer Australian Pharmaceutical Industries Ltd (ASX: API).
