The full-year result (FY26) for Sigma Healthcare (ASX:SIG) highlighted progress on several key strategic initiatives, including i) The domestic store rollout, ii) Growth in the International business and ii) Further progression of the private label strategy.

Notwithstanding upbeat Company commentary on the outlook for FY27, there are several factors presently weighing on sentiment. These include the slowdown in sales momentum from the flagship Chemist Warehouse (CW) network in Australia, lower-than-expected operating leverage despite strong sales performance), as well as a stock overhang from the founders’ shares coming out of escrow.

With this in mind, we recently researched the Company in The Dynamic Investor to assess if the risk-reward is becoming more attractive.

About Sigma Healthcare

Sigma Healthcare is one of three major pharmaceutical wholesalers in Australia with 20% market share. The majority of distributed pharmaceuticals are subsidised on the Pharmaceutical Benefits Scheme (PBS).

The Company has merged with Chemist Warehouse Group, the largest pharmacy retail player in Australia with over 600 stores. The transaction was accounted for as a reverse acquisition of Sigma by CW effective 12 February 2025.

Key Fundamental Drivers

Can Sales in Australia Improve?

Domestic sales remains the key growth engine for SIG. Like-for-Like (LFL) sales growth of +13.4% was underpinned by 18 store refurbishments, new products, and increased GLP-1 prescriptions. SIG also reported improving momentum across the Amcal and Discount Drug Stores brands, with management expecting network growth to resume in FY27. In context, the reported LFL sales growth was above average growth of +11.3% over the last 10 years on a CAGR basis.

In its outlook commentary, SIG noted that trading in FY27-to-date has commenced strongly with LFL sales growth exceeding 10% through July and August. The Company expects to maintain double-digit LFL sales growth for CW-branded stores for the balance of 1H27. This is supported by ongoing GLP-1 tailwinds (i.e. potential PBS inclusion and oral version approval), ongoing network expansion and increased private label penetration.

However, we consider that a return to above-average LFL sales growth (i.e. ~12-13%) is unlikely in FY27, given that the weakness in sales over the 4th quarter of FY26 was spread across multiple categories. In addition, the prospect of a further RBA rate increase is likely to place additional pressure on discretionary consumer spending.

Further International Growth

Further growth in the International business is a key catalyst for the shares and is predicated on the rollout of additional stores, in both existing and new markets. Notably:

• The New Zealand business is expected to continue growing its store count aggressively, given that CW is taking significant share from local incumbent pharmacies.
• A foothold in Ireland has enabled SIG to expand into the UK market. SIG plans to enter the UK in FY27, with two stores expected before December, and three in 2H27. The Total Addressable Market (TAM) in the UK is ~$83b (compared to ~$6.5b in Ireland). Despite the UK market having dominant players in Boots and Superdrug, there is an opportunity for a discount offering (such as CW) with a differentiated format and lower prices to gain market share.

Operating Leverage Underwhelming

The key negative surprise in the FY26 result was cost headwinds in the Australian network, with Gross Profit Margin (GPM) declining by ~20 basis points and total operating expenses growing at ~9%. On the former, significant growth in GLP-1 sales has led to a mix shift into a lower-margin category, but consistent with significant sales growth. Regarding the latter, the Company highlighted several one-off factors underpinning an elevated annual growth rate in General & Administration expenses.

Operating leverage is expected to improve over the medium term, with further synergies expected. Of the $100m per annum in identified synergies by FY29, the Company delivered ~$33m in FY26.

Gearing Expected to Remain Low

The Company has a conservative gearing level (on a net debt to normalised EBITDA basis), with significant funding headroom to invest further in efficiency/growth initiatives. Gearing as at 30 June 2026 declined to 0.57x, from 0.85x as at 30 June 2025. The reduction in gearing level is indicative of strong cash-generation, with further growth in cashflow to be supported by an improvement in working capital efficiency in FY27. Improved in-store availability, as well as an expanded supply chain are expected to support a further reduction in gearing levels.

Fundamental View

SIG shares are currently trading on a 1-year forward P/E multiple of ~33x. The limited trading history of the enlarged entity makes it difficult to assess the attractiveness of the current multiple relative to recent levels. However, it is worth noting that the current multiple appears unappealing in the context of:

i. An EPS growth profile of +17% over FY26-29 on a CAGR basis and
ii. An elevated investment risk profile from several factors, including: a) A continuation of weak trends in LFL sales growth for CW in Australia, b) Risk that the uplift to EBIT over the medium term from synergies is less than anticipated and c) A stock overhang, resulting from shares held by the founders coming out of escrow following the release of FY26 results. The founders have indicated they may sell up to 0.544m shares (4.7% of the issued capital) out of 5.3m shares owned.

Charting View

SIG appears to have been range-bound during the past 18 months. However, it was making lower highs for over 12 months now and it has now broken under the lower end of the trading-range, which is a negative sign. Not only that, but it has tried to rally back into the range during the past couple of weeks but has failed to do so. SIG is therefore at risk of falling to lower levels.

 

Michael Gable is managing director of Fairmont Equities.

 

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