In morning trade the Sigma Healthcare Ltd (ASX: SIG) share price has been one of the best performers on the ASX.
At the time of writing the pharmacy wholesale and distribution company's shares are up 7.5% to 92.5 cents.
What happened?
This morning Sigma announced that following ongoing discussions with My Chemist/Chemist Warehouse Group (MC/CW), the two parties have entered into a formal negotiation period to seek a commercial resolution to the issues in dispute.
These issues relate to MC/CW's intention to acquire certain products from an alternate wholesaler, potentially impacting Sigma's earnings before interest and tax by between $5 million and $10 million per year.
Which by my calculation was approximately 5.5% and 11% of its most recent full-year EBIT.
Sigma responded by initiating legal proceedings against MC/CW, but these have now been discontinued.
According to today's release, if a commercial resolution is not reached, the two parties have agreed to confidential and binding mediation and arbitration.
Should you invest?
Whilst I believe this is positive news for Sigma, I am still concerned that the relationship between the two parties will have soured to the point that it is unlikely MC/CW will renew its supply agreement with Sigma when it expires in June 2019.
As MC/CW is one of its biggest customers, the loss of the supply agreement could create a substantial gap in its future earnings that will not be able to be filled easily.
In light of this, I would suggest that investors continue to avoid Sigma and consider other healthcare shares such as Ramsay Health Care Limited (ASX: RHC) or Healthscope Ltd (ASX: HSO) instead.
