The ACCC has approved the merger between Sigma and Chemist Warehouse. We expect the issuance of new shares to Chemist Warehouse will not be until February 2025 at the earliest and could be in March 2025. For a brief period, the stock could have a float-adjusted market cap of $14 billion. By April 2025, the market will increasingly turn its attention to the fundamental earnings and valuation drivers. The most compelling feature is strong revenue growth of circa 10-12%, with more than half from store count growth. The greatest unknown is where sustainable margins settle.

Sigma Healthcare reported underlying EBIT growth of 20% in 1H25, while Chemist Warehouse reported standalone 2H24 EBIT growth of 37%. Chemist Warehouse EBIT for the comparable trading period is 14x larger than Sigma. This cements our view that the merger is the key driver of Sigma’s share price.

The proposed date for ACCC’s findings on the Chemist Warehouse-Sigma merger is 24 October 2024.  The timeline slipped with further details provided by Chemist Warehouse and Sigma. It is not a guaranteed approval given the combined entity will be a very large operator in the pharmacy market. While some see store divestments appeasing the ACCC, we are less convinced. The first issue listed by the ACCC is the vertical integration caused by the acquisition.

The proposed merger between Chemist Warehouse and Sigma will create a business with close to $760 million of combined annual EBIT with growth of 12%-19% over the next four years. However, the first hurdle is ACCC approval which may be a drawn-out process. While there is an impressive growth profile, the prospects for rollout beyond Australia and New Zealand is still in its infancy. The upside case would see continued elevated like-for-like sales growth and a seamless integration of the Chemist Warehouse contract.

Woolworths has made a bid for API, trumping Wesfarmers takeover offer. This battle has just begun. Both companies have the balance sheet. Both see improvements in Priceline’s sales and earnings. Wesfarmers is likely to place a greater value on both the Priceline loyalty members and the platform API may create for a Health division in our view.

We initiate coverage on Wesfarmers. While Wesfarmers retail businesses are well positioned, they have seen significant benefits to sales and earnings over past two years, which will partly reverse. As a result, retail earnings could drop over the next two years. A special dividend is possible near-term. Wesfarmers has over $10 billion in acquisition capacity on our estimates, but in recent times has only made smaller adjacent acquisitions within existing businesses. The creation of a Health segment is one logical extension for the company with an Australian healthcare industry EBITDA profit pool of over $28 billion.