Sigma Healthcare swings back to earnings growth on RAT demand, but still expects annual loss

Australia’s biggest pharmaceutical distributor has been delivering tens of millions of Covid rapid antigen tests to chemists each week, fuelling an earnings upgrade.

Sigma Healthcare chairman Ray Gunston is upbeat about the group’s outlook. Picture: Stuart McEvoy/The Australian.

Covid rapid antigen tests have propelled Australia’s biggest pharmaceutical distributor, Sigma Healthcare, back to earnings growth, sending its shares on a rollercoaster ride.

The company, which owns the Amcal, Guardian and Discount Drug Stores brands, says it still expects to report a full year loss of up to $10m, citing increased costs from an accounting software change.

In early trade on Wednesday, Sigma shares surged as high a 3 per cent before doing a U-turn and closing 2 per cent lower at 49c.

Delivering its third profit guidance in seven months, Sigma said it expected underlying earnings before interest, tax, depreciation and amortisation to rise up to 15 per cent, underscoring the volatility of the pandemic.

In December, it expected EBITDA to fall 10 per cent, after stating in September it expected a 5 per cent gain.

But in November the federal government approved the sale of over-the-counter rapid tests, with sales taking off in January as the highly infectious but less severe Omicron variant up-ended Australia’s Covid response.

At some Amcal pharmacies, queues stretched more than 50 metres as customers were desperate to secure rapid antigen tests, and Sigma cited this demand for its earnings upgrade. Since mid last month, it has been delivering tens of millions of rapid tests to pharmacies each week.

“The improved financial performance primarily reflects the rapidly evolving Covid-19 environment and the sudden increased demand for rapid antigen tests as a diagnostic tool, this project broadly on budget and on time through a pandemic, we have faced additional challenges in the context of completing implementation through the height of Covid-19 which resulted in significant volume growth in the month leading up to our January 31 2022 financial year close,” the company said in a statement.

It reiterated the on-off costs it expects from its accounting and enterprise resource planning (ERP) software change to be more than $30m.

Interim chief financial officer Jeff Sells said in December “a total ERP upgrade is a significant change management program for any company, and whilst we reached go-live on restrictions”.

“Unfortunately, this has had some significant impacts on our customers, and we are rectifying these issues as quickly as possible.”

This will weigh on net profit, with the company expected to report a loss of $5m to $10m. In 2021, the company reported a net profit of $61.2m, swinging from a $11.5m loss the previous year.

“The improved position as a result of the increased demand for RATs has also been partially offset by other costs associated with the implementation of our ERP solution and related business disruption and the impact of the closure of our Rowville Distribution Centre in late January,” Sigma said on Wednesday.

But Sigma chairman Ray Gunston said the company was positioned for growth.

“We remain confident in the future growth profile for Sigma, which was further underlined with the Sigma board recently approving the extension to our new Victorian Distribution Centre in Truganina,” Mr Gunston said in December.

“This will see $20m invested to double existing capacity to 40,000 square metres to accommodate the growth pipeline ahead. The extension is expected to be completed over the next 18-months.”

Its shares gave up most of its early gains to close down 2 per cent to 49c on the ASX on Wednesday.

Sigma will release its full year results on March 29.