The market reacted negatively to Sigma Pharmaceuticals’ December announcement that Pfizer – responsible for 10%-15% of Sigma’s revenue – is planning to distribute its products directly, thereby bypassing Sigma. The share price fell 15% on the day.
Shareholders should be happy. Using a balance sheet adjusted for the $900m sale of its manufacturing business to Aspen pharmaceuticals, shareholders have $693m of net working capital tied up in the business and the current market capitalisation is only $518m. Add up cash, inventory and receivables, subtract all liabilities and you’re left with some 33% more than the current share price.
If the balance sheet shrinks, that working capital would be available to distribute to shareholders (the company also has $78m in franking credits it could attach). The most effective way of shrinking the balance sheet would be to change the overly generous payment terms provided to customers. Another way is to simply lose them.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.