Sigma Healthcare Ltd’s [ASX:SIG] share price has crashed and burned hard on the ASX, plunging by more than 45% in early morning trade.
In a major company announcement today, the pharmacy operator revealed that it wouldn’t be renewing a supply contract with the My Chemist/My Chemist Warehouse Group.
Losing a client of that magnitude foreshadows a severe drop in profits for Sigma, and its had to cut its earnings guidance as a result. Projections for 2019–20 are now sitting at about half of its earlier guidance.
The market has been sent running, but could there be any opportunity in this?
My Chemist Warehouse is currently Australia’s largest pharmacy retailer, and has partnered up with EBOS Group Ltd[ASX:EBO] instead, whose share price has enjoyed a 5% swell.
At time of writing, Sigma’s share price is sitting at $0.51.
What’s the story?
The current deal between Sigma and Chemist Warehouse is not set to expire until June 2019, but the two parties failed to agree to an extension.
Sigma’s chief executive Mark Hooper implied that the terms of the deal wouldn’t make commercial sense, commenting, ‘we are not prepared to risk significant shareholder funds without adequate and sustainable returns’.
In an attempt to look at the bright side however, Mr Hooper has described the loss of the contract as ‘an important pivot point for Sigma,’ and an opportunity to redirect strategic initiatives in the right direction. He further stated:
‘It may be a step back in our short-term financial results, but it improves the risk profile of our earnings and also releases significant capacity to better leverage our infrastructure and resources in areas that can provide long term sustainable growth.’
Mr Hooper also outlined an intensive cost-cutting strategy.
Should we be concerned about sigma?
Though Sigma’s situation might be off-putting, investors interested in healthcare stocks could gain an opportunity with EBOS instead.
Sigma has vowed to continue paying a high proportion of profits as franked dividends, and the stock may experience some degree of recovery, but this may not be enough to keep investors confident.
There are certainly more appealing opportunities out there at the moment.
For Money Morning
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