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The primary aim of this study was to assess the historical and forecast financial performances of Sigma Healthcare Limited. The in-depth analysis includes industry, company, and financial analysis. The business valuation models such as free cash flow and dividend discount models will be used to make market return estimates, risk-free rate, and expected growth rate. The company maintains a significant market share in the industry, innovative products, and sound strategic management products. However, the company registered strong downward trends in revenue, EBITDA, and Net Profit after Tax (NPAT). The Free Cash Flow to Equity model also reveals that the company has consistently experienced a decrease in cash flows from operations for the past five years, raising liquidity questions of the company’s performances. The revenue growth rate was materially lower than the industry’s average rate, and the dividend growth rate was a negative figure, implying that investors are not likely to obtain positive returns on their investment. Based on such factors, we recommend that the most viable decision is not to hold or invest in Sigma Healthcare Limited.
The Sigma Healthcare Limited was found and established by Edwin Thomas and Earnest Holloway in 1912. The company’s operations are headquarters based in Rowville Victoria. The primary business activities include pharmacy retail brands such as Amcal Max, Discount Drugs, and Guardian, among others. The company also distributes medicines to private and public hospitals. The company’s business strategies include maintaining a strong distribution network which enhances the credibility of its image and products. It also supports strategic confederations with other independent pharmacists, including Pharmacy alliance. Another critical component of its business strategy includes innovative brands. As a result, the company maintains an estimated market share of 26.9% of pharmaceutical wholesaling in Australia (Msn.com 2019). The major competitors of the company include EBOS Group Limited, with a market share of 24.80% and Australian Pharmaceutical Industries Limited, which has a market share of 20.60%.
The corporation is also a fully integrated business which maintains its market share through the production of its products, exporting, and selling activities. Other factors that influence economic and financial performances include its participation in strategic confederations with government and private businesses, logistic systems, and marketplace. As a result, the company is ranked 94th out of 2000 public companies in Australia as a result of supporting and pushing the economy of Australia. The purpose of this report includes an analysis of the macro and microeconomic perspective of Sigma Healthcare Limited to assess its profitability, growth, financial stability, and overall efficiency. The results of the study on such factors will provide investors with viable financial information to make investment decisions.
The company has maintained a negative revenue and dividend growth rate of -5.18 and -0.54 respectively for the fiscal period ending 31-January 2018. Additionally, the current required rate of return for the company is 12% estimated using the Capital Asset Pricing Model, with an average estimated market beta of 1.85. The Free Cash Flow to Equity model also reveals that the company has consistently experienced a decrease in cash flows from operations for the past five years, raising liquidity questions of the company’s performances. The results are despite significant efforts by the company to cut costs. The valuation model of the company is also subjected to sensitivity analysis to assess the change in value and decision rule given long-run growth and discount rate. However, the estimated share prices under different scenarios remained under “not-to-hold” territory. Based on financial performances and as well as analysis of various industrial macro and microeconomic factors, we propose that the company is not a viable investment opportunity.
The conclusion and recommendation
Sigma Healthcare Limited maintains a high overall market share of 26.9% in the Australian Healthcare industry. The company also maintains a prudent management structure and strategies to beat the competition in the industry. However, any investment decision should be based on analysis of both macro and micro economic and financial factors affecting its operations. The company financial performance results did not meet expectations. Failure to meet the financial performance goals can be associated with several factors such as softer retail sales condition and the current effect of price reforms associated with PBS. The company registered significant downward trends in revenue, EBITDA, and Net Profit after Tax (NPAT).
The investment decisions by this report are solely based on previous fiscal year performances as well as forecast financial performances. Notably, the forecasted financial performance models are based on several assumptions which could differ materially from actual figures. The company also maintains a complex business model that can be significantly influenced by factors such as a shift in business strategy, and step down of chairman or influential people in the company. Such factors have been included in the model, as well as considerations for the previous year’s financial performances to assess and develop a reasonable forecasting model.
One of the important benefits of the models employed in this study is that the analysis is in line with the company’s strategic goals. The forecasting and valuation model used includes the Capital Assets Valuation Model, which identifies a required rate of return for the company to be 12%. An average beta of 1.85 explains the sensitivity of the company’s to market factors. The input data has been obtained from credible sources which include the company’s audited financial statement and yahoo finance, economic times, and others. However, the use of the Capital Assets Pricing Model presents significant limitations to the outcomes of the study. It is difficult to identify an Equity Risk Premium rate, and the uncertainties about Equity Risk Premium affect the acceptance of calculated value for required returns (Chordia, Goyal & Shanken 2015). The beta figure can change with time since it represents short-term returns government debt. The revenue growth rate was materially lower than the industry’s average rate. Additionally, the dividend growth rate was a negative figure, implying that investors should expect negative or no returns on their investment. The dividend discount model confirms the decision not to hold the company’s stock. Based on historical and forecast financial performance, the best choice is not to own or invest in Sigma Healthcare Limited.
- Chordia, T, Goyal, A & Shanken, J A, 2015. ‘Cross-sectional asset pricing with individual stocks: betas versus characteristics’, pp. 1-49.
- Msn.com, 2019, SIG – Stock quote for Sigma Healthcare Ltd – MSN Money, Msn.com, viewed 21 May 2019, <https://www.msn.com/en-au/money/stockdetails/asx-sig/fi-aa9eim>.
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