Is it too late to buy Sigma shares to cash in on the Chemist Warehouse deal?

Can investors still make healthy returns with this stock?

| More on:
A senior pharmacist talks to a customer at the counter in a shop.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Sigma Healthcare Ltd (ASX: SIG) share price has rocketed higher this year by more than 160% as investors took in the news that it's planning to merge with Chemist Warehouse.

Following the recent Australian Competition and Consumer Commission (ACCC) approval of the transaction, investors can now start thinking about Sigma Healthcare as the combined business.

The merged company will have a strong presence in Australia, and the two sets of leadership are excited by the potential to grow the store count and extract cost synergies.

One expert certainly thinks it's not too late to invest in the business. Let's look at who it is.

Broker calls Sigman Healthcare shares a buy

According to reporting by The Australian, the broker Morgans Financial has raised its rating on the ASX healthcare share to add.

Since 3 December 2024, the Sigma Healthcare share price has fallen by more than 9%, making it lower-priced and better value.

The companies point to a number of positives about a tie-up between the two pharmacy businesses.

Chemist Warehouse said in its scheme booklet to shareholders that the merged group will have the "potential to unlock significant synergies and efficiencies" and that it will create a "leading retail pharmacy franchisor and full-line pharmaceutical wholesaler and distributor."

This deal will "combine Sigma's extensive, automated distribution infrastructure and logistics capabilities with Chemist Warehouse's leading retailer and marketing experience".

Excluding synergies, the combined business would have made an operating profit (EBIT) of $605.5 million in the 2024 financial year.

How big could the synergies be?

Chemist Warehouse thinks that it can find a number of synergies, including general and administrative costs and supply chain optimisation. Initial estimates suggest cost synergies could be $60 million per year and be achieved by the fourth year after the deal is implemented. Full synergies are expected to be achieved in the fifth year after a deal is done. However, the one-off costs to achieve those synergies are estimated at $75 million.

Leadership approval

The chair of Chemist Warehouse, Jack Gance, said in a letter to shareholders:

Chemist Warehouse has an enviable track record of consistent year-on-year growth in both the Chemist Warehouse Retail Network and Chemist Warehouse Retail Network Sales.1 In the 20 years to 30 June 2024, the number of Chemist Warehouse Retail Network stores has increased by approximately 11 times and Chemist Warehouse Retail Network Sales have increased by approximately 57 times. One of the key drivers of our success has been developing and maintaining strong relationships and alignment with our franchisees, many of whom are shareholders.

The transaction represents the next step of our evolution. The Chemist Warehouse Board believes that the combination of Chemist Warehouse and Sigma makes strong commercial sense and represents a compelling opportunity for Chemist Warehouse shareholders.

Foolish takeaway

I don't think it's too late to invest in Sigma shares – in fact, it's cheaper to buy now than it has been for most of the last month.

In my view, the business still has a lot of growth potential in Australia as well as internationally – it's currently in New Zealand, Dubai, Ireland and China. The international growth potential looks very promising and could help drive earnings and shares higher for a long time to come.

Overall, I'm optimistic about the business.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Healthcare Shares

Excited couple celebrating success while looking at smartphone.
Healthcare Shares

Guess which ASX 200 stock just jumped 9% on big news

Let's find out what is getting investors excited today.

Read more »

Male doctor in a lab coat working at laptop looking serious.
Healthcare Shares

What are Cochlear shares worth according to Macquarie?

Let's see what the broker is saying about this blue chip.

Read more »

Shot of a mature scientists working on a laptop in a lab.
Healthcare Shares

When will CSL shares finally catch a break?

Here's where analysts think the biotech stock is heading next.

Read more »

An analyst wearing a dark blue shirt and glasses sits at his computer with his chin resting on his hands as he looks at the CBA share price movement today
Healthcare Shares

JP Morgan initiates coverage of Telix Pharmaceuticals. After rising 1,667% in 5 years, is it still a buy?

Can this ASX 200 juggernaut go higher?

Read more »

Cropped shot of an attractive young female scientist working on her computer in the laboratory.
Healthcare Shares

Why this top broker expects CSL shares to surge 26%

A leading broker foresees a big rebound ahead for CSL shares. But why?

Read more »

Man jumps for joy in front of a background of a rising stocks graphic.
Healthcare Shares

Guess which ASX All Ords stock is jumping on big US news

This small cap is catching the eye on Thursday. But why?

Read more »

three excited doctors with hands in the air
Healthcare Shares

Two ASX healthcare shares that could be set to double

This broker has buy recommendations on these two shares. 

Read more »

Overjoyed man celebrating success with yes gesture after getting some good news on mobile.
Healthcare Shares

Telix shares jump 7% on big US news

Let's see what is getting investors excited on Wednesday.

Read more »