Scott Power: Chemist Warehouse and Sigma officially say ‘I do’ as CSL & Cochlear feels heartache

Morgans analyst Scott Power said its been a big week for the ASX healthcare sector with half year results and Chemist Warehouse hitting the bourse through its merger with Sigma Healthcare.

Pic via Getty Images

• ASX health stocks fell xx% over past week, while the broader market was up about %

• Australia's biggest health care name CSL weighed on sector with soft H1 FY25 result

• Shares of merged Chemist Warehouse and Sigma Healthcare started trading on ASX 

Healthcare and life sciences expert Scott Power, who has been a senior analyst with Morgans Financial for 27 years, gives his take on the ASX healthcare sector for the week and his ‘Powerplay’ stock pick.

It has been a big week of news for the ASX health care sector with half-yearly results and pharmaceutical distributor Sigma Healthcare (ASX:SIG) completing its merger with discount pharmacy chain Chemist Warehouse.

Sigma, which has a Valentine's Day glow and is up 3.77% over the past five days,  now owns 100% of the issued shares in CW Group Holdings Limited (Chemist Warehouse) with shares of the combined group starting trade on the ASX on Thursday.

The union combines Sigma’s 400-plus pharmacies, under brands Discount Drug Stores and Amcal, and its wholesale distribution business (servicing more than 4000 chemists) with Chemist Warehouse’s 600 franchised outlets.

The market capitalisation of Sigma (pre Chemist Warehouse) has increased from ~$4.5 billion to ~$31.8bn following the merger.

“We expect the share price of SIG to be volatile over coming weeks as institutional and investor buying will likely be met by some CWG shareholder selling," Power said.

Following a recent trading update Morgans have upgraded its Sigma FY25 forecasts, with its target price, which includes a liquidity premium, increasing slightly to $3 from $2.98 with an add recommendation maintained.

From Thursday, Power said Sigma would be re-weighted in the S&P/ASX 200 and 300 indices and he estimated passive index funds would need to acquire an additional ~230m shares (~$655m).

"Then, at the March rebalance we expect Sigma will be large enough for both the ASX/S&P 100 and 50 indices," he said.

"Should it be included we expect another ~100m shares (~A$280m) demand from index funds.

"Additionally over time, SIG is likely to be eligible for inclusion in other global indices (MSCI and FTSE) driving demand for a similar number for shares from index funds."

Power said the merged group would move to a June reporting period, however, Sigma will first report its full-year FY25 result (January year end) in mid-March.

"It will be at this time we will restate our forecasts to reflect a June year end for the combined group," he added.

Healthcare drops as CSL & Cochlear half-year results weigh

At 1pm (AEDT) on Friday, the S&P/ASX 200 Health Care index (ASX:XHJ) was down 3.78% for the past five days, while the benchmark S&P/ASX 200 (ASX:XJO) rose 0.77% for the same period.

Blood-products giant CSL (ASX:CSL) and hearing tech company Cochlear (ASX:COH) have not been feeling the love after reporting half-year results, down 5% and 14% in the past five days respectively.

Morgan's healthcare analyst Derek Jellinek described the result of CSL as  "a bit soft, with with FX denting bottom line growth and vaccine sales pulling down top line gains".

"Although, constant currency margins held and OCF was strong," Jellinek wrote in a note to clients.

CSL reported net profit after tax (NPAT) of $2.01 billion for H1, up 7% on a constant currency basis, but below consensus of $2.16bn and Morgans estimates of $2.197bn.

Revenue of $8.48bn for the half was up 5% on a constant currency basis but slightly below consensus of $8.54bn and Morgans estimates of $8.65bn.

Sales were mixed for the company with its vaccine arm CSL Seqirus failing to overcome weak immunisations in the US, its plasma business CSL Behring remaining the heavy lifter with 10% growth in revenue compared to the prior comparable period and CSL Vifor increasing sales.

CSL reaffirmed full-year guidance with NPATA anticipated to be in the range of ~$3.2 billion to $3.3 billion at constant currency, up ~10-13%.

Morgans maintains an add rating on CSL but has reduced its 12-month target price from $330.75 to $329.26.

Meanwhile, Cochlear reported its implant revenue had grown 13% but that services growth had declined 12%. The company said while it had experienced a strong uptake of its Nucleus 8 Sound Processor when it was launched in FY23, the rate of uptake slowed in the past 12 months.

Management now expects to achieve the low end of its FY25 NPAT guidance of $410-$430M. Morgans currently has a hold rating on Cochlear with a 12-month price target of $300.02.

Mixed result for Pro Medicus

It was a mixed H1 FY25 result for radiology giant Pro Medicus (ASX:PME) with a "small miss on the revenue line" although strong margins aiding the company for a small beat to NPAT consensus to land in-line with Morgans' forecasts, according to Morgans healthcare analyst Iain Wilkie.

Pro Medicus reported NPAT of A$51.7m, up 42.7% and in-line with Morgans forecast of $51.6m and above consensus of $50.6m.

The results were driven by lower operating expenditure growth mainly around the employee expense line.

Revenue was up 31.1% to $97.2m, below Morgans estimates of $103.3m and consensus of $99.7m.

"As always, it's difficult to peg revenue timing given the volume of new contract go-lives," Wilkie wrote in a note to clients.

Operating expenses were up 11.3% to $24m, while  EBIT margins expanded to 72%, from 66%  and above consensus and Morgans expectations of 71% and 68% respectively.

A dividend of 25 cents per share was declared , up from 18 cents per share in H1 Fy24 and in line with Morgans estimates but slightly below consensus of 24 cents per share.

Shares in ProMedicus rose 4% to an all-time high of $298.98 before dropping back down to ~$280 after what appeared to be some profit taking.

Wilkie held expectations leading into the result that trading would likely be volatile given the record valuation and some risk around the result itself given the wide consensus range with timing of large contract go-lives being a material swing factor around the results.

"This has again proved to be the case," he said.

"As always, hard to find many negatives but no major news to over-excite us here outside of the stronger than expected margin result."

"New products across other ologies still appears to be a way off and we would expect the market to be closely tracking this over the coming year."

Power's Powerplay: EBOS to report its half-yearly results

While all eyes have been on Sigma, another pharmaceutical distributor EBOS Group (ASX:EBO) is Power's pick for the week.

EBOS, which is up around 16%, will release its half-yearly result next week. Power said he expected to hear that the company will continue to grow its core business, despite the loss of a wholesale supply contract to supply Chemist Warehouse from July 1, 2024, as it looks for further acquisitions in the animal care and medical device sectors.

Power said EBOS was a high-quality healthcare name with a diversified portfolio of revenue generating assets across community pharmacy including the Terry White franchise, hospital (institutional), animal care, and medical devices.

He does not expect EBOS to be impacted by the Chemist Warehouse and Sigma merger.

"Terry White, Priceline and Chemist Warehouse are the three major pharmacy brands in Australia and they're all doing well," he said.

Morgans has an add rating and 12-month target price of $39.04 on EBOS.

Ansell results 'better than expected'

Producer of personal protective equipment Ansell (ASX:ANN) is also feeling loved up this week after what Jellinek described as half year results which were " better than expected, with strong, double-digit top and bottom line growth".

Ansell's NPAT for H1 FY25 was up 57% to US$81 million, beating consensus of US$76.7m and Morgans forecast of US$75.5m.

The company upgraded FY25 guidance to underlying EPS of 118-128 cents per share from 107-127 cents and will pay an interim dividend of 22.2 US cents per share, up from 20.7 US cents.

"Industrial sales and margins both improved on new product introductions and higher pricing, while healthcare jumped on normalistion from channel inventory destocking and slowed production," Jellinek wrote in a note to clients.

However, Morgans still remains cautious with Ansell heading into the second half. Jellinek said its Kimberly-Clark’s Personal Protective Equipment business – which Ansell purchased within the last 12 months – was entering a transition phase and may see some sales leakage.

Morgans maintains a hold on Ansell and has increased its target price from $27.10 to $33.38.

Clever quarter for Clever Culture Systems

Clever Culture Systems (ASX:CC5), formerly LBT Innovations, has achieved cash flow break-even for operating activities in Q2 FY25 in line with previous guidance.

The company reported positive operating cash flow of $500k for the quarter with customer receipts of $1m.

Management has also guided to the next two quarters being operating cashflow positive backed by $3.9m in expected cash inflows,  including $1.6m from Astra Zeneca for a second order of its APAS (automated plate assessment system) Independence instruments (culture plate readers).

Clever Culture announced in December it had received another order from big pharma AstraZeneca for four additional APAS Independence instruments, which use artificial intelligence and machine learning software to automate the imaging, analysis and interpretation of microbiology culture plates.

"Key catalysts include announcements around expansion of additional orders within the customer base and orders from new customers," Power said.

The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.

Disclosure: The journalist held shares in CSL at the time of writing this article.

Originally published as Scott Power: Chemist Warehouse and Sigma officially say ‘I do’ as CSL & Cochlear feels heartache