Shares in Sigma Healthcare (ASX:SIG) have surged over the past year. The recent merger with Chemist Warehouse has improved SIG’s fundamentals on several fronts. In particular, financial results have demonstrated store network growth, improving product mix and greater efficiencies & synergies.

Importantly, there are numerous pathways to underpin further growth. We researched the Company in The Dynamic Investor earlier this month to assess whether these growth opportunities are reflected in the current share price.

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 (CW), 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

Continuing Sales Momentum

Sales momentum in CW accelerated in 4Q25, and, as alluded to above, with double-digit Like-for-Like (LFL) sales in the CW network continuing into 1H26. LFL sales in the FY26 year to date of >10% is expected to continue for the full year, as CW benefits from:

i. Growth across major categories including beauty, vitamins and supplements, healthcare/medicines, baby/children, and fragrances. While the Health & Beauty category will always remain competitive, all categories are growing and continuing to gain share.
ii. High growth of the pharmaceutical category (e.g., GLP-1s, prescription medicine’s etc),
iii. Space optimisation and
iv. Market share gains. In particular, CW pricing is comparable to Amazon and ~13-14% cheaper than Coles and Woolworths on a comparable product sample set.

Opportunity for International Expansion

CW has a highly scalable business model that is transportable into new geographies and as such, international expansion presents a major growth opportunity.

In Australia, CW has ~32% market share, outgrowing the sector by ~200 basis points (bps) pa for the past five years. Over the same period, CW has reported a Cumulative Average Growth Rate (CAGR) of +7.7% compared to +5.5% sector growth. The global retail pharmacy market is estimated to be currently worth ~US$0.83 trillion in size, with the APAC region representing approximately 21% share.

The international markets which provide the best opportunities for growth include Ireland/UK, Middle East and Europe.

Solid Earnings & Margin Outlook

In FY25, gross profit growth substantially outpaced cost growth with pro forma operating expenses rising 11% to support a corresponding revenue increase of 44.1%. This operating leverage includes minimal integration savings achieved in FY25.

Earnings before Interest & Tax (EBIT) is expected to double between 2025-28 as SIG exploits organic and international growth opportunities. Domestic store growth of +6%, new product development of own or exclusive private label (<10% in FY25) and synergies through scale (now $100m) are important components of SIG’s “four pillars of growth”.

Conservative Balance Sheet Gearing

The Company has a conservative gearing level (on a net debt to normalised EBITDA basis) of 0.85x. The low gearing level is indicative of strong cash-generation.

The strong levels of free cashflow in FY25 enabled the payment of a fully-franked final dividend of 1.3 cents per share, consistent with the 50–70% dividend payout policy.

SIG has secured a new 3-year $1.5b debt facility during FY25 (in addition to existing net debt of $750m) to deploy for domestic and international store growth plans.

Fundamental View

SIG shares are currently trading on a 1-year forward P/E multiple of ~47x. The limited trading history of the enlarged entity makes it difficult to assess the attractiveness of the current multiple relative to recent levels. Having said that, the current multiple appears undemanding in the context of an EPS growth profile of ~24% over FY25-28 on a CAGR basis.

We consider that the elevated trading multiple is justified given: i) A highly cash-generative business model (with operating cash conversion of 83%), ii) Growing market share (CW gained 130 bps of share of pharma and cosmetics market in FY25), iii) The potential for significant operating leverage (supported by scale, cost advantage and increased scope for synergies) and iv) There is a plan/pathway for long-term growth, as CW expands via new and expanded stores, with success in Ireland, China and NZ a further catalyst.

Charting View

For most of this year, SIG has been trading in a range between about $2.70 and $3.25. It is still in the middle of that range, so an ideal entry point from a charting point of view will either be at the bottom of this range, or if SIG can break above $3.25. A break above $3.25 would be a better buy signal (if it occurs) as that should then lead to a new uptrend in the stock.

 

Michael Gable is managing director of Fairmont Equities.

 

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