This ASX 300 stock just returned to profit, so why is its share price sinking?

This pharmacy chain operator is back into the black. So why are investors sitting on their hands?

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Today, there is no shortage of negative movers in the Australian share market, dragged down by energy and materials shares. One surprising addition to the market's disappointing performance on Wednesday is ASX 300 stock Sigma Healthcare Ltd (ASX: SIG).

Shares in the Australian pharmacy network are down after the company reported its first-half results for the 2024 financial year. Positive sentiment is lacking despite the $750 million company reinstating itself as a profitable business.

Let's take a closer look.

What did this ASX 300 stock report?

The latest half was one of simplification and efficiency at Sigma Healthcare. For the six months ending 31 July 2023, the operator of Amcal and Discount Drug Stores stripped out costs and exited uneconomical areas.

Positively, operating expenses were slashed by 21% compared to the prior corresponding period. A range of contributors drove this change including an improved overall work rate, streamlined processes, reduced IT and labour costs, and the elimination of elevated non-repeating costs.

Sigma reduced expenses while driving 7.5% like-for-like revenue growth across its business. These accomplishments enabled the company to improve its net profit after tax (NPAT) to $11.2 million from a $1.5 million loss.

In March 2023, Sigma decided to divest its hospital operations and assets through its Central Healthcare Services subsidiary. As noted by the company, this marked the exit of a low-margin segment, freeing up capital to focus on its core operations — pharmacy wholesale and third-party logistics (3PL) operations.

Due to what Sigma dubbed 'self-disruption', overall sales revenue declined 8.4% to $1,681.8 million. In addition, the prior comparative period was supported by demand for rapid antigen tests and other COVID-19 and cold and flu products.

Commenting on the result, Sigma CEO and managing director Vikesh Ramsunder said:

Service levels are at an exceptionally high standard, and at the same time operating costs are down 21% as we begin to leverage the investments made over the past six years. We have also taken tangible steps in executing our strategy to deliver sustainable and profitable growth. Securing the largest customer supply contract in the pharmaceutical wholesale industry was an endorsement of our improved service capability.

On 6 June, Sigma Healthcare was awarded a $3 billion supply agreement with Chemist Warehouse.

Why the underwhelming response?

The modest move in the share price of this ASX 300 stock likely has some shareholders scratching their heads. There are multiple reasons that could be behind the measly move in Sigma Healthcare shares — one of those being the extent of profitability.

Sigma's net income margin is calculated at 0.67% on its latest results. Before the pandemic, the company had been operating on a margin of above 1%.

Investors may have been hoping for a more profitable figure following the initial divestments and cost-out initiatives.

The ASX 300 stock has seen its share price rally 7.3% over the past 12 months.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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