In morning trade the Sigma Healthcare Ltd (ASX: SIG) share price has plunged lower following the release of its half year results.
At the time of writing the pharmacy chain operator and distributor's shares are down 6% to 57 cents.
Here is how Sigma performed in the first half compared to the prior corresponding period:
- Revenue down 2% to $1,960 million.
- EBITDA fell 32.6% to $31.5 million.
- Underlying EBIT of $34.1 million, down 22.8%.
- Reported NPAT down 50.6% to $13.8 million.
- Underlying NPAT has fallen 31.2% to $19.9 million.
- Interim dividend of 1.5 cents per share.
- Outlook: On track to meet FY 2019 underlying EBIT guidance of $75 million.
The soft first half performance was caused by a decline in low margin Hepatitis C medications, the up-scheduling of codeine-based products, PBS reform pricing adjustments, and the continuation of manufacturer exclusive direct distribution. In addition to this, the company's reported result was impacted by one-off redundancy and restructure costs.
However, management remains confident that the company is on track to achieve its full year underlying EBIT guidance of $75 million. Cost savings that have already been achieved are expected to lead to a stronger performance in the second half.
But things are not expected to get any easier in FY 2020 due to the well-documented loss of the MyChemist/Chemist Warehouse Group (MC/CW) supply agreement which will come to an end on June 30 of next year.
The agreement to supply over 400 MC/CW stores was a major contributor to its revenue and earnings but was lost to EBOS Group Ltd (ASX: EBO) earlier this year. In light of this, management is targeting underlying EBIT of just $40 million to $50 million for FY 2020.
Should you buy the dip?
While Sigma's shares may look reasonably cheap today, if you look ahead to FY 2020 they are suddenly not so cheap any more.
I estimate that the low end of its guidance range for FY 2020 would ultimately equate to underlying earnings per share of 2.3 cents. Based on this estimate, Sigma's shares are changing hands at 25x FY 2020 earnings.
This is a significant premium to rival Australian Pharmaceutical Industries Ltd (ASX: API), even though its shares are trading within sight of their 52-week high. As such, I would suggest investors stay clear of Sigma until its shares trade at a more appropriate level.
