Bell Potter has been busy running the rule over the Grattan Institute report this month relating to the pharmacy industry.
The broker notes that if the changes suggested were put in place there could be significant implications for Chemist Warehouse owner Sigma Healthcare Ltd (ASX: SIG).
What is in the report?
Bell Potter highlights that the Future Pharmacy report shines light on the inefficiencies of the funding and other arrangements for Community Pharmacy (CP) in Australia.
It notes that if “either side of politics to embrace the deregulation measures as recommended, earnings patterns for SIG and many of the pharmacies whose earnings are preserved by this pharmacy gerrymander would change forever.”
Commenting on the report, Bell Potter said:
The Grattan report identifies numerous inefficiencies within Australia’s system for CP including pharmacy remuneration and the opacity of data supporting the current structure, however, maximum venom is reserved for the pharmacy ownership laws and location rules.
The rules are no longer fit for purpose and now act as a handbrake to further competition while preserving the earnings stream of incumbents. The rules also prevent the participation of supermarkets in CP for reasons that are less clear with each passing year.
Thankfully for Sigma Healthcare and its shares is that Bell Potter believes any potential changes to regulations would still be a long way off. It adds:
Whether the Grattan report influences change remains to be seen, however, CP is probably a long way down the Federal Government’s priority list for reform. Additionally, reform in this section of the market is unlikely to generate momentum on polling day, particularly if the Guild and AMA oppose changes as history suggests is likely. For these reasons, the regulatory environment supporting Community Pharmacy and the likes of Sigma Healthcare are unlikely to change.
Should you buy Sigma Healthcare shares?
According to the release, Bell Potter has retained its hold rating and $3.00 price target on the company’s shares. This is just a touch above its current share price of $2.93.
Commenting on its hold rating, the broker said:
Regulatory upheaval in CP is unlikely, nevertheless, investment metrics for SIG are not sufficiently attractive to warrant a Buy rating, particularly with a single payer (the Federal Government) representing a disproportionate level of group revenue.
The Government’s propensity to alter funding arrangements on short notice with little industry consultation should elevate the risk rating on SIG. We maintain our Hold rating and PT $3.00.
The post Chemist Warehouse: Are Sigma Healthcare shares a buy, hold, or sell? appeared first on The Motley Fool Australia.
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Motley Fool contributor James Mickleboro 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.