Archived on 5th January 2024 and taken off watchlist due to merger with CWH representing good value for SIG share holders. But do not want to hold CWH as a listed company due to management an board structure post merger.
Added to Watchlist: Dec 22nd 2022
Sigma Healthcare Ltd (ASX:SIG)
22nd December 2022
SIG are in the process of trying to turn their business round and have made changes at board level and are near completing their infrastructure rebuild program. Which has had a few issues during implementation and contributed to their poor performance. But they seem to be confident the worst is behind them, and things will be smoother from here on. SIG have not offered any forward guidance, so their Full Year Report in March 2023 will be much anticipated!
SIG have an extensive operation that entails wholesale distributions, 3PL, Chemist Franchising (Amcal & Discount Drug Store), and hospital and aged care pharmacy distribution. With plans in place to streamline these operations and make it more efficient and easier to do business with. They also are planning to enter the health & beauty market and increase their own label offering. Health, medical and hospital spending and costs continue to increase. This is a huge market and has strong long-term tail winds driven by an aging population and changing health policies, SIG benefited from COVID and the increased demand for RAT’s, masks etc. They are certainly in the right place at the right time, and if they can turn things round, there is upside here. In their half year report in July 2022, SIG reported increasing revenue, earnings, and cash flow, despite not making a profit for the half, but for the optimist this could be considered a sign the turnround is starting to take place. Also to keep in mind, is that much like API who were taken-over by Wesfarmers, SIG could be seen as a takeover target.
| Earnings &Margins | 2018 | 2019 | 2020 | 2021 | 2022 |
| Sales Per Share $ | 4.25 | 4.14 | 3.50 | 3.44 | 3.49 |
| CFPS $ | 0.07 | 0.01 | 0.21 | -0.01 | -0.05 |
| EPS $ | 0.06 | 0.04 | -0.01 | 0.05 | -0.01 |
| Gross Profit % | 6.95% | 6.87% | 6.25% | 7.03% | 6.59% |
| Cash Conversation % | 79% | 12% | 1844% | -52% | -257% |
| EBITDA % | 2.2% | 1.8% | 0.3% | 0.7% | 0.5% |
| EBIT % | 2.05% | 1.57% | -0.04% | 0.33% | 0.12% |
| NPAT % | 1.4% | 0.9% | -0.3% | 1.3% | -0.2% |
SIG have not been able to convert sales and earnings into cash flow or profits consistently. Which is evident by all the percentages and ratios here. Revenue has declined from $4bn in FY18 to $3.4bn in FY22. Low inconsistent single figure earnings and profit margins are simply not good enough for a company to create value for shareholders. Traditionally SIG have traded on EBITDA margin between 3-2% and a profit margin of 1-2%. Given their revenue a small 1-2% increase in margins can result in tens of millions or hundreds of millions increase in the bottom line.
| Management | 2018 | 2019 | 2020 | 2021 | 2022 |
| Current Ratio | 1.3 | 1.5 | 1.3 | 1.3 | 1.7 |
| Days Debtors | 52 | 53 | 32 | 35 | 38 |
| Days Creditors | 47 | 45 | 38 | 39 | 37 |
| Working Capital ($m) | $405.7 | $430.9 | $257.0 | $310.9 | $328.0 |
| Change in Working Capital ($m) | -25.2 | 173.9 | -53.9 | -17.1 | |
| Days Inventory | 31 | 32 | 33 | 37 | 34 |
| Deprecation/Cap Ex % | 9.6% | 7.9% | 38.4% | 48.8% | 170.4% |
Given the poor earnings and profit margins, surprisingly SIG’s liquidity (ability to pay its bills) is quite good with the current ratio, days debtors and days creditors all improving. Working capital has reduced and days inventory has remained stable. Despite SIG’s struggles to turn a profit they have kept up a solid capital expenditure program. SIG have forecast capex to be in the range of $40m in FY23 and then normalise to $5-10m in FY24 as their infrastructure upgrade program comes to an end.
| Debt & Interest | 2018 | 2019 | 2020 | 2021 | 2022 |
| Debt to Equity % | 38.0% | 61.4% | 63.0% | 41.8% | 66.2% |
| Net Debt ($m) | $113.6 | $243.2 | $196.0 | $199.1 | $292.3 |
| Interest Coverage Ratio | 12.9 | 5.3 | -0.1 | 0.9 | 0.4 |
| Debt to EBITDA | 2.2 | 4.4 | 27.3 | 8.5 | 18.0 |
| Debt to Cash Flow | 2.8 | 37.2 | 1.5 | -16.4 | -7.0 |
| Financial Gearing ($m) | 6.1 | 2.4 | -13.7 | -9.8 | -9.7 |
SIG has been able to service its debt but there is not much wriggle room here, as since FY20 EBIT earnings has not cover interest payments and using FY22 EBITDA earnings it will take 18-years to payback their debt. The good news is that as of July 2022 SIG had reduced total debt from $323m to $251m. Indicating management is committed to paying down debt. For me, I would like to see them stop paying dividends until either they payoff or reduce debt further, or resume paying dividends once earnings and profit margins improve. SIG have paid a divided in all years but 2021, despite not making a profit in FY20 and FY22. This means the dividends were funded by cash reserves and/or debt, which is not sustainable and nor does it create value for shareholders.
| Dividends | 2018 | 2019 | 2020 | 2021 | 2022 |
| DPS (cents) | 0.06 | 0.04 | 0.03 | 0.00 | 0.02 |
| Payout Ratio % | 100% | 106% | -257% | 0% | -316% |
| Dividend Cover | 1.0 | 0.9 | -0.4 | 0.0 | -0.3 |
| DY % | 12.2% | 8.7% | 6.1% | 0.0% | 3.7% |
Given my previous thoughts above, it’s not surprising to see that the dividend has declined, and that EPS does not cover the dividend being paid in FY2022. SIG need to improve their earnings and profits for their dividends to be sustainable.
| Assets & Equity | 2018 | 2019 | 2020 | 2021 | 2022 |
| Asset Turnover | 3.0 | 3.1 | 2.9 | 2.8 | |
| ROA % | 6.4% | 4.5% | -0.1% | 0.9% | 0.3% |
| ROE % | 10.8% | 7.2% | -2.4% | 8.7% | -1.3% |
This table says it all really, SIG used their assets well to generate revenue, but at this stage, this is not flowing through to the bottom line, as return on assets and equity have struggled.
| Valuation | 2018 | 2019 | 2020 | 2021 | 2022 |
| Price to Sales | 0.2 | 0.1 | 0.2 | 0.2 | 0.1 |
| EBITDA Multiplier | 10.7 | 10.9 | 80.5 | 34.0 | 44.8 |
| Historic PE | 8.2 | 12.2 | 0.0 | 11.8 | 0.0 |
| PEG Ratio | 0 | 0.0 | 0 | 0.0 | |
| Book Value (cents) | 0.48 | 0.48 | 0.45 | 0.5 | 0.56 |
| Price to Cash Flow | 6.4 | 53.1 | 2.4 | -40.7 | -11.5 |
| Share Price (cents) | 0.47 | 0.47 | 0.49 | 0.54 | 0.54 |
| Market Cap ($m) | 846.9 | 528.6 | 689.1 | 661.4 | 514.1 |
| EV ($m) | 960.5 | 771.8 | 885.1 | 860.5 | 806.4 |
| Cash Flow Multiple | 6.4 | 53.1 | 2.4 | -40.7 | -11.5 |
If you are a glass half full type of person and you believe in the turnround story they are dirt cheap at $0.61 (as of 31/12/2022). Consensus forecasts have net profit and EPS stabilising and then increasing for FY23 and FY24 at $9m and 23m and $0.01 and $0.02 respectively, indicating things are on the improve or at the very least not getting worse. Further to this point, despite making a loss of $1.5m, SIG reported a 6% and 16% increase in revenue and EBITDA earnings for the half year ending July 2022 on a pcp basis, more encouraging for me though, cash flow from operations increased from negative $9m to $97.9m. This increase in cash flow has allowed SIG to paydown their debt and may be an early sign that the turnround is starting to take shape. Two points to finish on, these early signs are enough for me to consider a small parcel of shares and wait for further trading updates and their full-year results, as they may surprise on the upside. Having said that, if they miss consensus forecasts on the downside, their share price will get smashed. Finally the healthcare sector is considered a defensive sector and insulated from the economy, somewhat; and if they do turn things round and given the poor economic outlook for 2023, SIG might be a good defensive stock to have in a portfolio!
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