Sigma Healthcare: Company Unlikely to Overcome All Competition Concerns

Shares in no-moat Sigma Healthcare are materially overvalued as we think there is a significant risk of regulatory resistance and do not yet factor in Sigma’s potential acquisition of Chemist Warehouse in our base case. In contrast to the market’s reaction, we don’t think Sigma’s proposed remedies materially derisk regulatory clearance, given it doesn’t address other major competition concerns from the Australian Competition and Consumer Commission that we think stem from the significant structural advantage in vertical integration and market share that it would gain. In addition, our preliminary estimate of forecast fiscal 2025 earnings for the merged group implies Sigma’s shares are currently trading at a forward P/E ratio of 33 times. This suggests minimal upside if the deal goes through as proposed, outweighed by the significant downside risk if Sigma cannot overcome all ACCC concerns. The rejection of the deal, as we expect, is a potential catalyst for the share price closing the gap to our fair value estimate of AUD 0.78 per share.