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Sigma share price rockets on Chemist Warehouse news

The Sigma Healthcare Ltd (ASX: SIG) share price has started the week on a very positive note.

In morning trade the pharmacy chain operator and distributor’s shares are up 11% to 74 cents.

Why is the Sigma share price rocketing higher?

Investors are responding very positively to an announcement out of the company this morning.

That announcement revealed that Sigma has signed a major first-line agreement with My Chemist/Chemist Warehouse Group (MC/CW Group).

According to the release, the agreement is for the supply of fast-moving consumer goods (FMCG) products and is effective from December 1.

The build-up of supply will be done progressively and is expected to reach a full run rate by July 2020.

Management estimates that the agreement will generate $700 million to $800 million in sales during the first full year of operation.

This is a big win for Sigma and a very surprising turn of events. Sigma previously supplied FMCG products to MC/CW before it switched to another provider – DHL Supply Chain.

Sigma’s managing director and CEO, Mark Hooper, appeared to be very pleased with the agreement.

He said: “Sigma understands what is required to provide effective support on these product ranges, and the financial terms of the new agreement provide an acceptable return on capital employed for Sigma shareholders.”

“The investment we have already made in our distribution centres provides the efficient platform to absorb this volume, maintain our growth ambitions, and enhance our ability to better service our existing customer base which has achieved above market growth over the course of the year,” Mr Hooper added.

Earnings impact.

The new agreement is likely to have a negative impact on its FY 2020 EBITDA guidance.

This is due to the initial work and costs involved with transitioning the MC/CW agreement. It will also delay the timing of some of the expected savings from its Project Pivot strategy.

But in FY 2021 and beyond, management is confident that its earnings growth will accelerate.

Mr Hooper said: “We expect our growth to accelerate in FY21 and beyond as we benefit from contributions from Project Pivot, efficiencies from our distribution centre investments, and the progressive ramp up of the CW contract.”

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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