Sigma shares extend gains as analysts hike valuations
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The news: Shares in Sigma Healthcare extended gains on the ASX as analysts hiked their valuations on the pharmaceutical wholesaler, following the competition regulator's decision to clear its $8.8 billion merger with retail chain Chemist Warehouse on Thursday.
The numbers: Sigma shares were up 2.67% to $2.50 by 11:36am AEDT, having closed 24.9% higher on Thursday.
Analysts hiked their valuations on Sigma:
- Morningstar raised its fair value estimate by 99% to $1.55 per share;
- Morgans increased its target price from $1.23 to $2.21 and kept its 'holding' rating; and
- Citi lifted its target price from $1.40 to $2.50 and retained its 'neutral' rating.
The context: Morningstar analyst Shane Ponraj said "we are surprised" by the Australian Competition and Consumer Commission's (ACCC) approval of Sigma's acquisition of Chemist Warehouse, which is subject to proposed remedies offered by Sigma to address the regulator's competition concerns.
Ponraj said the remedies did not address the "significant structural advantages it would gain" and allows the merged group to "potentially offer a lower wholesale markup to independent pharmacies and its own stores than competitors can afford".
Ponraj noted that Sigma shares are now "materially overvalued", trading at an implied market cap bigger than Coles of over $28 billion. Morningstar increased its earnings per share forecasts by an average of 67% across FY27 to FY29, but Ponraj warned that there is a risk of earnings disappointment if the Sigma's merger with Chemist Warehouse fails to achieve expected growth in store rollouts.
Elsewhere, Citi analysts said they expect Chemist Warehouse to continue to take "market share in the pharmacy sector, particularly from supermarkets and department stores in front of store categories given its discount positioning".
Morgans increased its EBITDA forecasts by 16% in FY26 and 21% in FY27 based on higher revenue growth post-merger with Chemist Warehouse.
The sources: Morningstar research, Citi research, Morgans research
