a comprehensive review, page-4

Aegis research shows the following:

Consensus View FY08 FY09
Consensus EPS (c) 12.1 13.5
EPS Growth (%) 12.0
P/E Ratio (x) 14.2 12.7
P/E Rel. All Ords (x) 0.92 0.88
P/E Rel. Sector (x) 0.74 0.71

Key Valuation Assumptions
Method: DCF
Beta: 1.10
Market risk premium (%): 5.50
Risk free rate: 5.75
Forecast cashflow (years): 10
Residual value % of total valuation: 53
Notional 5-10yr growth rate (%): 3

Number of Brokers in Earnings Survey: 14

8 Hold 4 Buy 2 Strong Buy 12 Month Target $2.24

Company Summary

Activity Summary - Sigma is the third largest pharmaceutical wholesaler by market share in Australia. Sigma also manufactures pharmaceuticals and antibiotics for in-house brands as well as for contract clients. Through its merger with Arrow, Sigma now develops generic pharmaceutical products and markets and distributes generics for Australian and international pharmaceutical companies in the Australian market.

Investment View (overall) - Sigma has demonstrated an ability to successfully respond to the changing PBS environment, although wholesale margin reductions and Community Service Obligation payment allocations have caused SIP some pain. SIP is now a major generics player through its merger with Arrow. Our long-term view is favourable.

Investment View (over the next 12 months) - PBS cuts and strong generics price competition are negatives for SIP. However, we expect SIP to respond to these challenges with growing generics sales, higher margin products from the large plant expansion at Dandenong and a successful rollout of the Embrace program among pharmacies. Despite a flat FY08 earnings outlook, at current levels we maintain a positive 12 month view on SIP.

Current Issues

Strategic Direction - Sigma is focused on maximising operating leverage and capital efficiency from its businesses. Sigma is targeting an EBIT contribution of 90% from the pharmaceutical business, having reached 70% as a result of the merger with Arrow. Sigma is intent on becoming the lowest cost operator among Australian pharmaceutical manufacturers in order to protect its market share and expand profitability. The broad combined product range should give the merged Sigma-Arrow a strategic edge over competitors.

Risks - Key risks include 1) Competitive risk from other industry players (Symbion and API in pharmacy distribution, Alphapharm in generics); 2) Manufacturing risk, as SIG increases in-house manufacturing activities and 3) Government policy changes to constrain PBS spending, and, in the medium-term, revision of the next pharmacy industry agreement in five years' time to further reduce wholesaling margins or open up the industry to competition by supermarkets.

Primary Share Price Catalyst - Continued success in signing up pharmacies to the new Embrace program should support SIP's share price. Another acquisition of a branded pharmaceutical portfolio, following Sigma's success with Herron, would drive Sigma's share price higher. Higher than expected growth of Sigma's generics business would also be a positive price catalyst. Moves by the Government to force through more major PBS changes would negatively impact SIP's share price.