The Sigma Healthcare Ltd (ASX: SIG) share price is having a strong start to the day.
In morning trade, the pharmacy operator and supplier's shares are up 30% to 83 cents.
Why is the Sigma Healthcare share price racing higher?
Investors have been bidding the Sigma Healthcare share price higher today after the company won a major contract.
According to the release, the company has signed a binding term sheet with Chemist Warehouse for the supply of both Pharmaceutical Benefits Scheme (PBS) medicines and Fast-Moving-Consumer-Goods (FMCG) product for a period of five years commencing on 1 July 2024.
This will come as a huge relief to shareholders, because the company is the current supplier of FMCG products to the pharmacy chain giant. In fact, management estimates that the current supply contract represents 29% of net sales revenue.
So, the loss of this contract would have hit the company hard. This goes some way to explaining why the Sigma Healthcare share price is thriving today.
But the key driver of gains today is likely to be the inclusion of the supply of PBS medicines which previously belonged to EBOS Group Ltd (ASX: EBO).
Including these PBS products, management estimates that total sales of products to Chemist Warehouse will generate a minimum of $3 billion in revenue in the first full year of the contract.
As a comparison, for the 12 months ended 31 January, Sigma Healthcare reported total sales of $3.66 billion. So, based on its current supply agreement accounting for 29% of total sales revenue, or approximately $1.06 billion, this would appear to indicate that the new agreement will result in a sales revenue boost of almost $2 billion.
What are the terms?
As you might have seen in the past, Chemist Warehouse uses its powerful position to its advantage when it comes to negotiating agreements.
At the start of the supply contract, Sigma Healthcare will issue Chemist Warehouse approximately 10.7% (post issuance) of its share capital for free. So, with an issue value of $0.642 per share, this equates to an $81.5 million consideration. Management believes this share placement helps align both parties' long-term strategic interests.
Chemist Warehouse will also be given the right to acquire certain non-core assets from Sigma Healthcare, which have a value of $24.5 million. If Chemist Warehouse chooses not to acquire those assets, then Sigma will make a net cash payment to Chemist Warehouse of $24.5 million.
Sigma Healthcare's CEO, Vikesh Ramsunder, commented:
The decision by Chemist Warehouse to award Sigma this supply contract is wonderful news for our company and our shareholders. The contract allows us to leverage our highly automated distribution centres and latent spare capacity after multiple years of investment. We thank Chemist Warehouse for their confidence in our service capability and awarding of the contract.
Sigma has worked tirelessly the past 12 months to build a stronger company and to significantly improve our operational performance for the benefit of all customers. Securing this Chemist Warehouse contract means we will now have real scale and momentum moving into the future.
Due to the timing of the agreement, there is no impact on Sigma Healthcare's existing FY 2024 EBIT guidance of $26 million to $31 million.
