Stock showdown: Does Sigma Healthcare deserve a similar market value to Woolies?
Sigma’s merger with Chemist Warehouse has brought one of Australia’s best retail businesses to the public.
Welcome to Stock Showdown, where I compare the business and investment merits of different companies by leveraging Morningstar’s equity research.
Today’s candidates both hail from the ASX, and they are both fixtures in most Aussie suburbs. We’re going to be comparing Woolworths and Sigma Healthcare. As I’m sure you know, the latter recently merged with Chemist Warehouse.
I chose these two companies for a couple of reasons. For one, Sigma’s merger with Chemist Warehouse serves up one of Australia’s most popular retail concepts to public investors. It seems natural to compare it to the country’s most storied retailer.
As Shane Ponraj pointed out in his recent report on Sigma, the two companies now trade at very similar market capitalisations. This surprised me a bit, so I wanted to dig into it and see whether it was justified. Let’s start with a bird’s eye view of both firms.
Sigma Healthcare (SIG)
The new look Sigma Healthcare brings together two dominant players in the Australian pharmacy industry.
The Sigma side houses one of Australia’s largest pharmacy distribution businesses, which makes money by wholesaling prescription and over the counter products to Chemist Warehouse and other stores like the Amcal and Discount Drug Stores franchises owned by Sigma. It also rakes in franchise and royalty payments from those brands.
The Chemist Warehouse side receives franchise and royalty payments from Chemist Warehouse franchisees. It also wholesales front of store products (such as perfumes and cosmetics) to these stores.
Shane estimates that Chemist Warehouse will generate roughly 40% of the combined group’s revenues but almost 90% of its profits in the coming year. During that time he expects the newly merged group to generate roughly $9.8 billion in revenue and around $840 million in operating profit.
Woolworths Group (WOW)
Woolworths has four main segments: Australian Food (the Aussie supermarkets business), Australian B2B, New Zealand, and the department store Big W. Aussie supermarkets delivered 95% of the group’s pre-tax earnings in fiscal 2024.
In fiscal 2025, our analyst Johannes Faul thinks Woolworths Group will generate around $69 billion in revenue and the best part of $3 billion in operating profit.
Figure 1: Forecast revenue, forecast EBIT and market capitalisation on June 25 2025. Source: Morningstar
Given the relative scale of these two companies today, perhaps you can see why I was surprised that Sigma and Woolies have similar market values. Three potential reasons for this came to mind.
1. Different business models
Sigma and Woolies are most associated with well-established retail brands, but they have very different business models.
Woolies makes its profits from operating stores itself. Meanwhile, Sigma makes a large portion of its profits from franchise royalties, which is an incredibly capital light way to generate earnings.
This difference explains the difference in our analysts’ forecasts for profit margins and returns on invested capital at the two companies.
The graph below shows our forecast operating margins for both. We think Sigma’s will be higher than Woolies’ and rising, and Woolies’ to be roughly flat.
Meanwhile, we expect Sigma to have higher returns on capital than Woolworths Group and need to invest less capital to generate additional earnings.
Figure 3: Forecast adjusted ROICs at Sigma and Woolworths Group. Source: Morningstar
If you owned a business and wanted to generate an extra $1 million of profit, would you rather invest $8 million or $9.4 million to generate it? That is the difference between a ROIC averaging 12.7% and an ROIC averaging 10.6%.
Sigma’s low capital intensity also shows up in Shane’s estimate of how much capital expenditure will be needed to maintain Sigma’s business at its current size.
He forecasts that Sigma’s capex will need to average about $35 million per year or less than 1% of group sales. That is remarkably low.
For Woolies, this number has historically been 3-4%. Again, this difference reflects the different business models and Sigma not operating stores.
2. Insanely good operating numbers at the store level
The capital light nature of Chemist Warehouse’s franchise model is joined by the impressive numbers churned out by the stores themselves. One illustration of this is how much revenue Chemist Warehouse stores make on a sales per square metre basis.
569 Australian stores in fiscal 2024 at an average of 522 square meters per store (as per company figures) gives 297,018 square metres. Divide system sales in Australia of $7.9 billion by that and you get $26,631 in sales per square metre.
Is that good? You bet it is. Woolworths, which has worked out the retail game pretty well by this stage, reported $19,477 in revenue per square metre in H1 of fiscal 2025, while Coles was similar at around $20,000 per square metre.
Chemist Warhouse beats the supermarkets by over 35% on this metric. And this will make sense to anybody that’s ever shopped in one of their stores. I don’t think I’ve ever seen a store layout that has 1) such narrow aisles 2) so many items relative to the size of the shop.
Sigma benefits from this in several ways.
First of all, many costs in the retail business - like rent and staffing a small store - are mostly fixed. The more sales there are, the stronger profit margins for franchisees become as those fixed costs make up a smaller percentage of revenue.
These solid store economics should help Chemist Warehouse attract more pharmacists to partner with them and operate under the Chemist Warehouse banner.
Exceptional sales efficiency also means more royalties on revenue for Sigma (at ultrahigh profit margins) and more sales for its wholesale businesses that supply Chemist Warehouse stores with products. Not to mention even more buying power from greater scale.
Combine all of this with high barriers to entry in the Australian pharmacy wholesale industry, and investors may simply think that Sigma has a better business than Woolies does. Even if the latter currently makes three-and-a-half times more in operating profit.
Does this explain why Sigma trades at over 43 times our forecast for pre-tax profits and Woolworths trades at 13 times, though? Perhaps some of it. But I would bet that the next point is important too.
3. Different growth trajectories?
Investors seem to see a lot of room for Chemist Warehouse to grow from here. Far more room than Woolies has to grow its profits, anyway. At first glance, this makes sense. Woolies is about as mature a business as you can get.
Most of the suitable locations for supermarkets in Australia have been tapped by this point. An expansion into new countries also seems unlikely, so growth looks set to come mostly from population growth and passing inflation through to shoppers.
Our analyst Johannes Faul’s forecast for Woolies reflects this. He expects Woolworths’ revenue and operating profits to grow by an average of 4% per year over the next decade, mostly due to price inflation.
By contrast, investors have a few potential growth levers to grasp at for Sigma and its vital Chemist Warehouse business. These include more Chemist Warehouse franchises opening in Australia and abroad, same-store sales growth, and healthier group profit margins.
Are investors expecting too much from Chemist Warehouse and Sigma, though? Our analyst Shane Ponraj thinks they might be. Let’s start with the Australian store rollout.
Lever one: Domestic store openings
Shane’s recent report on Sigma included an estimate that recent stock prices seem to bake in Chemist Warehouse opening 30 net new stores per year for the next decade. Shane sees a few reasons that this could prove too optimistic.
First of all, opening a new pharmacy in Australia is complicated. There are strict rules on who can own them, while gaining approval to open one also involves a lengthy and frequently unsuccessful approval process.
Because of this, Chemist Warehouse’s best bet for new franchise stores are those acquired by pharmacists from independent operators that are retiring or selling up for some other reason.
This tight regulatory environment restricts growth and Shane thinks that a lot of the easy fruit has already been picked. He also thinks that Chemist Warehouses current store footprint is well on its way to being big enough to serve Australia’s population.
In this chart from his full report on Sigma, you can see that the company’s number of stores per 100,000 Australians is approaching that of other staple outlets like Woolies, McDonalds and Coles.
Figure 4: Stores per 100,000 Australians. Source: Morningstar, company filings, ABS.
Shane thinks investors could be expecting an acceleration in store openings and ignoring these potential headwinds. He forecasts 20 per year for the next five year and a slower pace after that.
Lever two: Same store sales growth
As for same stores sales growth, Shane thinks investors are baking in roughly 8% per year for a decade. Potential issues here include newer store locations being less productive and the burden of expectation on front of store (i.e unregulated) products.
This category of products, such as fragrances and sunscreen, currently makes up around 60% of Chemist Warehouse’s network sales. As a result, Sigma’s wholesaling of these products to Chemist Warehouse’s store owners is a key driver of earnings growth.
Shane points out that if Chemist Warehouse can grow that quickly in these categories, it is unlikely that other shops selling these goods (like Woolies) wouldn’t bite back in an attempt to win back share.
Shane’s forecast of 6% average same-store sales growth factors in 2.5% industry price growth, 1.5% industry volume growth, and 2% from market share gains. Again, he thinks that investors are betting on inflated recent rates of growth to continue for too long.
Lever three: group profit margins
The third assumption that Shane thinks is baked into Sigma’s current share price are group EBIT margins reaching somewhere around 17% within ten years. This is actually the lever that Shane is closest to agreeing on.
He thinks that a group EBIT margin of 15% is doable within a decade. Drivers here include group revenue skewing more towards the more profitable Chemist Warehouse side, and the company optimising its distribution assets.
The difference here may again stem from the market being overly optimistic on the potential for growth at Chemist Warehouse, and therefore less of Sigma’s overall revenue coming from this higher margin side of the business.
Overall, Shane says that Sigma satisfying the market’s expectations on any one of the three main growth levers would be impressive. Hitting them all at once, though? That, he says, would be truly surprising.
This isn’t to say that Shane doesn’t have pretty high expectations of Sigma himself, though. His fair value estimate for the company reflects his assumption that earnings per share will grow 17% next year and at roughly 10% per year on a mid-cycle basis.
Why doesn’t Sigma have a Wide Moat?
The two main explanations I offered for Sigma being ascribed a similar stock market value to Woolies were as follows: investors preferring Sigma’s business model, and investors seeing far more potential for earnings growth.
Both of those viewpoints seem perfectly valid. But not everything is in Sigma’s favour versus Woolies. For one, our analysts had the confidence to assign a Wide Moat rating to Woolies but only a Narrow Moat rating to Sigma. How come?
Johannes recently upgraded Woolies’ moat rating to Wide on account of what he sees as a durable cost advantage in Australian grocers. Woolies is far bigger than even its biggest competitors, which gives it unrivalled operating leverage and higher margins.
Thanks to its scalebased cost advantage, Woolies can make these higher margins at prices that help it offer value to shoppers and defend market share. He thinks the company’s position is so strong that excess returns on capital can persist for 20+ years.
Meanwhile, Shane thinks that Sigma is a high quality business with defendable competitive advantages. But he doesn’t have enough confidence in a 20+ year period of excess returns to award a Wide Moat rating.
He sees Sigma’s scale advantage in health product wholesaling – not dissimilar to that enjoyed by Woolies in food – as hard to replicate. Sigma has over 40% share here, which lets it buy and sell stock at lower prices than smaller peers while remaining profitable.
The merger with Chemist Warehouse essentially safeguards Sigma’s contract to supply Chemist Warehouse stores, while the capital light and high margin business model we’ve discussed enhances the group’s potential to deliver excess returns on capital.
Despite these positives, Shane is hesitant to award a Wide Moat rating amidst competition on unregulated products and the potential for regulation to weaken the pharmacy’s grip on over-the-counter products within the next twenty years.
Perhaps a tad ironically in the context of this article, a beneficiary of any such change could be… Woolies and the other supermarkets.
Does Sigma deserve the same market value as Woolies?
Our analysts don’t think so. At Shane’s fair value estimate of $2.40 per share, the market value of Sigma’s equity would be a touch under $27.5 billion. Meanwhile, Johanne’s $30.50 per share fair value for Woolworths put its market cap at around $37 billion.
In other words, we think Woolies is worth around 34% more than Sigma Healthcare. As opposed to them sporting similar market caps today.
Which would I rather own?
If Sigma and Woolies traded at a similar multiple of earnings or cash flow, I would gravitate towards Sigma given its more profitable business model and greater growth potential. You would potentially be getting more bang for your buck.
But, of course, the two shares don’t trade at similar valuation multiples. And nor are they likely to, given some of the differences we’ve discussed today.
Those differences could make Sigma and Woolies suitable for different roles in a portfolio – but only at the right price. I think it’s fair to say that neither company’s shares look underrated right now.
