Portfolio Changes - Sell Aurizon (AZJ), Buy Sigma Healthcare (SIG)

Changes to both Australian Equities Income Portfolio & Blended Australian Equities Portfolio

Sell Aurizon (AZJ)

Post Aurizon’s (AZJ) investor update at the recent Macquarie Australia conference we have sold our position in the portfolio.  The business update was disappointing across each of AZJ’s segments, namely Network, Bulk & Freight. Network volumes in the ten months to 30th April 20025 were 169.1mt, 4.0mt lower than the prior corresponding period.

Lower volumes in the first four months of 2H25 were driven by the impact of wet weather that affected both mine production and port terminal operations. Bulk volumes were 45.3mt, 11.0mt lower than the prior corresponding period impacted by the cessation of production at the Kwinana Bausite/alumina refinery.

The Bulk business also faced the challenge of 3 customers going into administration, with the potential for impairment of receivables to increase. While cost-out initiatives of ~$50m have been announced to mitigate challenging market conditions, FY25 EBITDA guidance is expected to be at the lower end of the range $1,660m-$1,740m and is subject to no additional provision for impairments being incurred in 2H25.

Changes to Blended Australian Equities Portfolio

Initiating Sigma Healthcare (SIG)                                                                                   

We view Sigma as a compounding growth retailer with good earnings visibility, driven by the dominant market position of Chemist Warehouse. The merger of Sigma and Chemist Warehouse in February 2025 combined a pharmaceutical wholesaler and distributor (Sigma) with Australia’s largest retail pharmacy franchisor (Chemist Warehouse). Sigma is the largest vertically integrated pharmacy distributor in Australia, with network sales from franchisees representing ~35% of the ~A$28bn industry.

The Chemist Warehouse (CW) has consistently outperformed pharmacy growth trends and is also growing ahead of other dominate Australian retailers (Bunnings, JB Hi Fi). Supportive of our investment thesis was Chemist Warehouse 1HFY25 result that delivered retail network sales of 13% and EBIT growth of 36% versus the previous corresponding period.

Our investment thesis is premised on

(1) Sigma’s market-leading position as the largest domestic pharmacy distributor and franchisor

(2) Structural tailwinds of an ageing population and consumer focus on health and wellbeing

(3) CW’s national and international store rollout

(4) merger cost synergies with Sigma guidance of ~$60m over four years, ~100bps margin uplift driven by increased own brand penetration & introduction of new categories

(5) Superior earnings growth from operational leverage created through scale and dominance of discounter model focused on customer value

(6) High barriers to entry due to regulatory restrictions at both the wholesale and retail segments.