ScoPo's Powerplays: ASX health stocks fall as Morgans upgrades Sigma on proposed Chemist Warehouse merger

ASX health stock falls in past five days outpace broader markets
Morgans upgrades Sigma target price on Chemist Warehouse merger
PolyNovo eyes breakeven for FY24 with profit growth from FY25 onwards

Healthcare and life sciences expert Scott Power, who has been a senior analyst with Morgans Financial for 26 years, explains what the movers and shakers have been doing in health and gives his ASX Powerplay.

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To markets….

And ASX health stocks are in need of some positive mindfulness and exercise this week. At 11am (AEDT) Friday the S&P ASX 200 healthcare index (ASX:XHJ) was down 1.2% for the week, while the benchmark S&P ASX 200 (ASX:XJO) was 0.8% for the same period.

The XHJ is now down 0.3% since January 1 while the broader market is down 1.9%.

“The rally at the end of the year was predicated on some rate cuts coming through in 2024 and now it’s more of a question how many, how big will they be and maybe they won’t be as big as what everyone thought,” Power says.

“There is also concerns about geopolitical tension and there’s a little bit of profit-taking coming through after the solid run at the end of the year.

“I don’t think any of it steps away from our bullish stance for ’24, particularly in terms of our strong outlook for the small cap market which has chronically underperformed for the best part of two years up until the first of December.”

Power says quarterly reports will be worth investors watching at the end of this month along with H1 Fy24 reporting season in February.

“I think on the whole we will be pleasantly surprised across the healthcare space,” he says.

Morgans upgrades Sigma on Chemist Warehouse merger

Morgans has upgraded pharmaceutical distributor and Amcal owner Sigma Healthcare (ASX:SIG) following its proposed merger with Chemist Warehouse.

Power says since the merger was announced in December the SIG share price has traded well above its previous target price of 85 cents/share.

The broker has maintained an Add rating but now includes a 20% premium to set a new target price of $1.07.

“We had been telling clients to take part positions in Sigma and the share price is now in the mid-90s so we felt that we needed to adjust that target up,” he says.

Power says Morgans thinks the biggest risk to the merger not going through is the ACCC knocking it back.

“Our view is the ACCC will allow this merger and we think the consumer will not be disadvantaged and pharmaceutical wholesalers will not be disadvantaged because there is no structural change,” he says

“Consumers will still get the same sort of pricing under the combined group so that is our view and this has probably six months to play out before we get a decision from the ACCC but we want to stay on the front foot and start building a part position.”

He says a part position is if you we were looking to buy $10k worth of shares then you might buy $2-$3k now and when there is confirmation of ACCC approval, buy the rest.

“Albeit, you might be buying at a higher price but you have that certainty,” he says.

EBOS a good alternative to SIGMA

Power says an alternate way to play the Chemist Warehouse and Sigma merger is to invest in another major pharmaceutical distributor EBOS Group (ASX:EBO)

“It is a good alternative and they do have a very good track record including 10 years of plus 10% EPS growth, which is quite outstanding,” he says.

“We have a price target of $39.43, which is about 20% higher than the current share price and it’s got a 3% yield so that’s a very attractive way to play the market at the moment.

“There will be a dip in EBOS earnings in FY25 because they have lost the Chemist Warehouse contract but we believe that subsequent years will more than make up for that FY25 dip.”

The SIG & EBO share price today:

ScoPo’s Powerplay – PolyNovo eyes breakeven in 2024

Wound care company PolyNovo (ASX:PNV) is Power’s stock of the week. Morgans has an Add rating and 12-month target price of $1.88 on the stock, which is ~20% more than its current price of ~$1.58.

PNV specialises in the development and commercialisation of dermal regenerative solutions with its FDA approved Novosorb BTM (biodegradable temporising matrix) used to temporarily close a wound and aid the body in generating new tissue.

NovoSorb BTM is a man-made synthetic polymer that does not contain any biologic materials, which the company says is important because traumatic wounds often contain bacteria that may cause infection.

PNV’s complementary NovoSorb MTX has also received 510(k) FDA clearance and uses the technology platform underpinning the clinical success of BTM, but without a sealing membrane for cases when it is not required.

“In November PolyNovo recorded a record for monthly sales of $8 million, which is setting the company up for a solid first half result to be reported in February,” Power says.

“We forecast revenue growth of 40%/16%/24% for FY24/25/26 respectively.

“As a result, we forecast FY24 to achieve breakeven, followed by profit growth from FY25 onwards.”

The PNV share price today:

The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead. Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.