By Michael Smith
Chemist Warehouse has raised investor expectations of bumper earnings growth and big margins ahead of its expected listing on the ASX, reporting sales of more than $5 billion in the last six months of 2024.
The retailing giant will shake up the market when it completes its merger with Sigma Healthcare, with brokers expecting the combined company to move into the S&P/ASX 50 index when it begins trading next month.
On Tuesday, Sigma told shareholders that sales at the chain had increased 13 per cent to $5.2 billion in the six months to December 31 with the opening of 19 stores. Earnings rose 35 per cent to $437.9 million in the same period.
“There is no reason to suggest earnings growth will moderate into the second half of the year, given the strength of the pharmacy category and their relative competitive offering to cost conscious consumers,” Wilson Asset Management senior investment analyst Sam Koch said.
“After the merger with Sigma, we believe that management will be able to re-focus on offshore growth opportunities (including two new stores … opened in Dubai) and whilst simultaneously driving significant synergies.”
Chemist Warehouse chief executive Mario Verrocchi said the company had grown “through new franchise store openings and international expansion while implementing new supply agreements to drive efficiencies”.
Sigma shares hit a record high of $3.13 on Tuesday before closing 12 per cent higher at $3.02 on the back of the Chemist Warehouse earnings update. Chemist Warehouse shareholders are expected to approve the merger with Sigma Healthcare, a wholesaler and franchiser with brands such as Amcal and Discount Drug Stores, at a meeting on Wednesday night.
The merger was announced in December 2023 but required approval from the Australian Competition and Consumer Commission. The regulator agreed to allow the deal in November, with the merger to create a company with almost 1000 stores and annual earnings of close to $1 billion.
Analysts expect Chemist Warehouse to repeat the earnings performance in the second half with the financial year, taking pre-tax earnings to $800 million. They said there was still room to grow market share given Australian consumers’ appetite for cheap pharmacy products.
Ord Minnett analyst Tom Godfrey said the combined company’s business model, which did not require large amounts of capital investment, would make it easier to grow in Australia and overseas.
“We remain positive on the outlook for growth and margins but expect near-term price action to be dominated by passive/index buying and non-escrowed Chemist Warehouse shareholder selling,” he said in a note to clients.
Chemist Warehouse had 658 stores in five countries at June 30, 2024, compared to 622 stories in four countries a year earlier. It has flagged further international expansion after the Sigma merger.
Barrenjoey analyst Tom Kierath said Chemist Warehouse delivered strong margin expansion despite slowing Australian like-for-like sales growth which moderated from 11.2 per cent for July through to October to an estimated 8.9 per cent growth in November and December.
The Gance and Verrocchi families, who co-founded Chemist Warehouse, must hold their shares until the company releases its financial results in August, after which they can sell a maximum of 10 per cent of their holdings. Their remaining shares are held in escrow until August 2026. However, other Chemist Warehouse shareholders will be able to sell their shares.
The Australian Financial Review’s Chanticleer column reported last week that analysis by proxy advisory firm Ownership Matters shows one Chemist Warehouse shareholder will emerge from the merger with shares worth more than $600 million, while two will hold stakes worth more than $400 million. Seven shareholders will have stakes worth more than $200 million.
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