Sigma soars as investors rush for a piece of Chemist Warehouse

Sigma Healthcare’s share price surged 36 per cent on Wednesday as investors scrambled to claim a stake in the reverse listing of Chemist Warehouse, feted as one of Australia’s best retailers. However, some fund managers expressed doubts about the share price exuberance amid concerns about regulatory risk and lack of detail.

More than $89 million worth of Sigma shares were traded on Wednesday, a staggering jump on the daily average of $2 million, with the share price rocketing as much as 75 per cent to $1.35 in the morning and seesawing throughout the day before closing at $1.04.

Sigma Healthcare’s share price soared after trading resumed on Wednesday.Credit: Steven Siewert

“Everyone’s just quite excited by the deal. We haven’t had a great deal of corporate activity this year,” said VanEck deputy head of investments and capital markets Jamie Hannah.

“Nobody really knew where to price it … So it’s kind of difficult to ascertain where fair valuation is at the moment. But it’s just showing a lot of companies are seeing some benefit in it, and other investors are buying it at this point in time.”

The $8.8 billion merger of the two companies, revealed by this masthead last Friday and formally announced to the market on Monday, has put to bed several years of rumours of a Chemist Warehouse float and driven investor excitement about the new entity.

Market watchers commended Chemist Warehouse’s strong brand and business model as capital-light and highly profitable, with the average store earning $12-13 million compared to the typical pharmacy average of $1-2 million; its strong front-of-house sales of beauty, skincare and vitamin products; and its growth prospects. Chemist Warehouse co-founder and CEO Mario Verrocchi has signalled intentions to expand its number of stores outside Australia to “infinity and beyond”, inspired by the UK pharmacy and beauty chain Boots.

Chemist Warehouse’s Mario Verrocchi (right), with Sigma CEO Vikesh Ramsunder.Credit: Eamon Gallagher

Tribeca Investment Partners lead portfolio manager Jun Bei Liu said the share price jump was because Sigma was trading “very cheaply” prior to its proposed merger with Chemist Warehouse.

“The 40 per cent [increase] is a reflection of people repricing what Chemist Warehouse should be trading on,” Liu said, adding that the business has strong margins and was well-run.

“Usually when you put these things together, it certainly represents a very good opportunity for investors, in a defensive sector as well.”

But fund managers and analysts also noted that there remained more questions to be answered about the business, such as how much of the company will be tradeable on the stock exchange; details of its new ownership structure; and where growth and profitability will come from.

Tribeca Investment Partners lead portfolio manager Jun Bei Liu.Credit: Janie Barrett

One senior chief investment officer, who does not have shares in Sigma and declined to be named, described the share price jump as “overdone” and “overvalued” and said much of it was being driven by initial excitement about the news.

“It just looks a bit expensive for us. We understand it’s a great brand with good growth, but we also think there are some strong regulatory risks,” he said. “We don’t see any reason [why] if Chemist Warehouse can sell prescription drugs, why Woolworths can’t.”

Opinions are split on whether the deal will receive the competition watchdog’s approval. Morningstar analyst Shane Ponraj believes it will be blocked by the ACCC, which he said would assess whether the merged entity – which would have an estimated market share of over 50 per cent – would gain disproportionate bargaining power or result in closed pharmacies or distribution centres if Sigma and Chemist Warehouse consolidate assets.

“We think the ACCC will likely reject the deal and do not yet factor in a merger in our base case,” said Ponraj.

Ophir Asset Management head of research Luke McMillan praised Chemist Warehouse as “an incredibly high-quality business” but also voiced concerns around pharmacy ownership, independence and competition, as raised by the Pharmacy Guild last Friday.

McMillan believes the transaction will ultimately be approved by the ACCC, but will have to “carefully negotiate” their relationship with the Guild to “keep them onside” and continue growing.

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