What Do We Lose When Disruption Wins

Chemist Warehouse feels like a simple retail story until you look at the structure behind it and the way it’s entered the sharemarket through Sigma. We walk through what Sigma actually does, why most of us haven’t heard of it, and how a “merger” can effectively operate as a reverse takeover when a much larger private business takes centre stage. If you’ve been watching the headlines and wondering why a company with no obvious need for cash would list at all, we unpack the motivations: liquidity for long time owners, the signalling value of being publicly listed, and the credibility that comes with transparent reporting when you’re talking to governments and regulators. 

From there we dig into the engine room: the franchise style model, the buying power, and why not owning every property can keep debt low while still scaling fast. We talk about what makes Chemist Warehouse attractive to investors, including dependable demand drivers like an ageing population, plus the less obvious detail that a large share of sales comes from front of store products rather than prescriptions. We also keep it grounded with the big caution flag: price. A great business can still be a risky investment if the valuation has already “galloped away”, and offshore growth plans are never guaranteed. 

Then we open the phones and tackle the questions people are really making decisions on right now: gifting shares to adult grandchildren and the tax traps to watch, whether superannuation should keep lifting exposure to international shares even when the US feels politically unstable, and what to do after receiving a small inheritance that could clear the mortgage. We also cover bonds, interest rate expectations, franking credits for retirees, and a pointed warning about how debt can unravel even big names like Mineral Resources. If you value practical investing talk that connects markets to everyday choices, subscribe, share this with a mate, and leave us a review telling us what topic you want next.

DISCLAIMER: This podcast contains general financial information only. That means the information does not take into account your objectives, financial situation, or needs. Because of that, you should consider if the information is appropriate to you and your needs, before acting on it. If you’re confused about what that means or what your needs are, you should always consult a licensed and trusted financial planner. Unfortunately, we cannot guarantee the accuracy of the information in this podcast, including any financial, taxation, and/or legal information. Remember, past performance is not a reliable indicator of future performance. The Rask Group is NOT a qualified tax accountant, financial (tax) adviser, or financial adviser. Access The Rask Group's Financial Services Guide (FSG): https://www.rask.com.au/fsg

Transcript

Welcome And General Advice Disclaimer

SPEAKER_00 0:00

The Talk Investing Podcast and blog discusses investment advice from our previous podcasts and radio shows by Remo Greco and Marco Melado. Learn all things around retirement and investing.

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On the ABC Listen app, your smart speaker.

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And on your radio.

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This is ABC Radio Melbourne and Victoria.

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With Lisa Leon.

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On the Money.

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And remember that anything we share here is general in nature. It doesn't take into account your personal circumstances, financial situation, or needs. Remo is very clever, but even Remo doesn't know what the future holds. Good morning, Remo.

SPEAKER_02 0:59

Ain't that the truth? Good morning, Lisa. How are you going?

SPEAKER_06 1:01

Oh, good. Well, we've got a hot one right

What Sigma Does And Why

SPEAKER_06 1:04

now. Um, as I mentioned, people would have seen or heard of Chemist Warehouse, but they may not have heard of Sigma. So what is going on here with Sigma?

SPEAKER_02 1:16

Good question. So Sigma is an old company that's been around for a long time and distributes pharmaceuticals and things that go in chemist shops, all the stuff from front to back.

SPEAKER_06 1:26

So not consumer-facing, that's why we might not have heard of those.

SPEAKER_02 1:29

They're a wholesaler, so you don't you don't hear them. They they traditionally were supplying Amkel chemists. So most people would remember that name, Amcal Chemist.

SPEAKER_06 1:38

Oh, taking me back.

SPEAKER_02 1:40

So

The Chemist Warehouse Listing Twist

SPEAKER_02 1:41

Chemist Warehouse has been a private company forever. They've decided to come onto the share market and they've merged with Sigma.

SPEAKER_06 1:47

Well, it's a bit tricky, isn't it?

SPEAKER_02 1:49

Sigma was a very small company, and Chemist Warehouse is a very large company. So a merger is what Sigma calls it. But in fact, it's it's a reverse takeover. So essentially Sigma now will be ninety percent of its business will be the chemist warehouse business and ten percent will be the old style uh and just for people who might be interested, why would chemist warehouse have done this kind of backdoor listing?

SPEAKER_06 2:13

Why not an initial public offering, which is the normal way, an IPO is the normal way you float on stock exchange taking private to public.

SPEAKER_02 2:20

They don't need any money. This thing is just a cash generator. And so often you go to the markets. I mean, essentially the ASX was born to help companies raise money and do things. This company doesn't need to raise any money. So essentially it's really, I think, an avenue for the 300 shareholders that have been around in Chemist Warehouse for a long time, including its founders, to commence their their liquidation or slow delivery of their assets to the next generation, as part of that.

Prestige And Global Expansion Motives

SPEAKER_02 2:50

And there is also a view that being a public company can deliver certain prestigious ticks that you want. So Chemist Warehouse now is is building uh a fairly big presentation of the government.

SPEAKER_06 3:02

It's got a growth strategy.

SPEAKER_02 3:04

Dubai, uh Ireland, New Zealand. And so often if you're dealing in some of those countries, it might pay to say to a government or an authority, hey, you want to know about us? We're listed, we've got an annual report, everything is laid bare, uh come and do your best.

SPEAKER_06 3:21

Now, some interesting things. So uh we're doing on the money right now. Remember Greco is here, so he's our share market specialist, and we're looking at what's hot and what's not, and we've decided to look at the chemist warehouse brand. There's a really interesting story behind this, and there's some knock-on effects for basically investors and the stock market.

No Debt Franchise Power Explained

SPEAKER_06 3:39

I was really interested when you said um chemist warehouse did not need the money. I read that they have no debt. How is this possible?

SPEAKER_02 3:47

Yeah, that's just really a big tick to the way the founders and the team that they've established enable them to build this business. Now, they don't necessarily own the chemists themselves. This is more of a franchise model, a bit like Harvey Norman and those sorts. So essentially what Chemist Warehouse is providing to the chemist is come into our family, for want of a better term, change the name, and you get the benefits of our technology, our marketing strategy, the capital. Buying power. The buying power. And so for a lot of chemists they go. Who owns the land? So it could be you and me. So we might own the the the freehold.

SPEAKER_06 4:25

Yeah, unlikely, but yes, I know what you mean.

SPEAKER_02 4:28

Okay. The the group of chemists that are involved in there may just be tenants. Chemist Warehouse come in.

SPEAKER_06 4:33

Oh, so Chemist Warehouse doesn't own the land. They don't own the land.

SPEAKER_02 4:36

They own some of the shops, but not a lot. Hence no debt. The real the the attractiveness of this business is like most uh sort of technology businesses today, is that you don't have to own hard assets. You effectively have a recipe uh that delivers a certain product and it's quite unique. And that's what they've really developed over 25, 30 years. In fact, even more than that. It's probably fifty years they've been around.

SPEAKER_06 5:00

Uh anything we share here is general in nature. What doesn't take into account your specific financial situation or your needs. But I do want to look into why do you think it's hot right now?

Why Investors Are Excited

SPEAKER_02 5:11

Yeah, um I got calls from people overseas over the last few weeks. It's everywhere. Look, I think the thing is that this is a $30 billion company. It's bigger than Kohl's, Brambles, some of these household names that people know. It is essentially the 20th largest listed company on the ASX. It's only been there for three minutes. And I think what it perhaps is the excitement surrounding this is really about a business that's really well known that has quite uh dependable revenue streams, aging of the population, the way that we go and get our prescriptions, uh a tried and true brand name. That's quite unique. The growth is probably the thing that really triggers the big end of town looking at this. We've seen uh a whole raft of companies over the last 10 or 20 years that are household names Domino's Pizza, JB Hi-Fi.

SPEAKER_06 6:06

Yeah, and they're all big. Yeah, yeah.

SPEAKER_02 6:09

So these are these sorts of businesses are a bit rare in Australia because we're an old economy, we don't grow that much. So if you're in superannuation and you want to grow your assets for the next 20 years, you want companies that are growing like Chemist Warehouse.

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Here's

Front Of Store Profit Model

SPEAKER_06 6:23

another fun fact about Chemist Warehouse that I think is really interesting is that they actually have a very low percentage that they make money from prescriptions from. So that's why they're really interesting for the chemist market, because they are not there. They're actually selling other products. It's kind of a crossover with the supermarket.

SPEAKER_02 6:43

That's right. So you can remember I think Woolworths tried to become a chemist years ago and was knocked back by ACCC and the authorities. So what chemist warehouse has done is 75 percent of its sales come from what they call front of store. So, you know, me buying my moo or my goat soap or whatever, those sorts of things, you buy them too leasing.

SPEAKER_06 7:00

I didn't know you were a goat soap kind of guy, but now I do.

SPEAKER_02 7:04

So these are the sort of things that we go, we don't ask about the price, we just buy them. Yes. 25 percent, you have to walk all the way out of the back to go and see the guy with the white coat to get your prescriptions filled. The exact opposite is what happens in normal pharmacies. Normal pharmacies make 75 percent off prescriptions and 25 off the front. So you've got um an a unique sort of business that's been able to deliver really strong results. Like the growth is absolutely phenomenal. They're doing 40 new stores a year just in Australia.

SPEAKER_06 7:34

Anything

Valuation Risk And Overseas Uncertainty

SPEAKER_06 7:35

to be cautious about here with everything?

SPEAKER_02 7:38

Price. Um This has really galloped away and it's it's really expensive. Um most growth companies are expensive today, so you have to be a bit careful here.

SPEAKER_06 7:49

And people put all sorts of things in their forecasts about how they can grow, and you know, going into different markets is hard.

SPEAKER_02 7:55

That's right. There's no guarantee that Dubai or Ireland or the or China will be successful. What the market says is the the group here, the executive group has a really good track record of delivering. Um in Victoria, we're in Victoria here, you probably notice that there's a lot of chemists' warehouse. But in in effect, in Brisbane or in Queensland and New South Wales, there's not that many. That's where the growth is. Right.

SPEAKER_06 8:19

On ABC Radio, it is 10 30. We're doing on the money and you're with Lisa Leong and our share market specialist, Remote Greco. We're gonna go to the phone lines in just a tick. Hold on

Disruption Versus Local Pharmacies

SPEAKER_06 8:31

tight. Sounds like they could reduce their prices a little.

SPEAKER_02 8:34

Yeah, well, I suppose owning Sigma now and Sigma being a distributor, there might be an avenue there for them to do better buying and therefore reducing prices. But um do we say the same of Bunnings when we go there? Do we say the same of some of the other stores that have really just you know um disrupted the market? It's often not the case. It's convenience more than anything else.

SPEAKER_06 8:54

Uh Tony from Butern Reed, Chemist Warehouse, don't need sorry, don't need another supercorp, support your local pharmacy.

SPEAKER_02 9:04

Yeah, I think that's the single biggest pushback we get from our clients who just say, look, you know, we saw this in the hardware industry, mum and pop in the corner went, you know, went out of business because of bunnings and whatever. But in a in a sense, uh we're here for you know to to produce portfolios and provide companies that grow. And disruption is just accelerating in our lives everywhere, and there are going to be people that get sidelined by this, no doubt.

Gifting Shares And Tax Consequences

SPEAKER_06 9:29

Okay. Shelley from East Gipps Uncle, but didn't want to speak on the air. So Shirley, we're going to take your question though. This is for Remo. How's it best to gift shares to adult grandchildren or better to sell shares and give them money?

SPEAKER_02 9:44

Um there's probably a tax angle you need to be careful with doing it. If you sell the shares, you crystallise perhaps a profit, so you need to think about how that affects your tax position. If you gift them, that's the same as disposing them anyway. So there'll be some tax angles that you need to perhaps get behind. But either or doesn't really matter.

SPEAKER_06 10:02

Okay. Right. Thank you, Shirley. Okay, let's go to Michael now, who's been waiting patiently. Hello,

Super Funds And US Market Fear

SPEAKER_06 10:08

Michael.

SPEAKER_04 10:08

Oh, good morning, thank you. Um this uh business with Australia uh superannuation companies uh are going to invest a lot of money in America with a very unstable president. Do you think that's a good idea? Have the people in there in this got a choice whether they invest in these uh this American venture or not?

SPEAKER_02 10:31

The superannuation industry has been increasing its exposure to global shares now for a long time. Even ourselves, in our portfolios, we probably had five to ten percent of our portfolios in global shares uh twenty years ago. Today I would argue that global shares are as important as domestic shares in our portfolios. We probably have 35 percent of our assets in offshore shares, 30 to 35 percent of the area. I'm not gonna go and buy Telstra that sits at $4 for the next 50 years. My clients can't retire on that. It's as simple as that. They're not going to go and buy old companies where we've got two supermarkets, four banks, and a couple of insurance companies. We just can't do that in Australia.

SPEAKER_06 11:13

So if you've got a growth strategy which is more than current sort of appreciation, then basically you've got to have international stocks. Trevor Burrus, Jr.

SPEAKER_02 11:24

If you haven't, you've underperformed the equity markets by so much that you can't afford to retire. Like you're just chasing your tail. It is difficult. Uh and and we perhaps want to have a bias here to Australia, but we are a s small economy predominantly with a weak currency, which is what you know what governments and industry really want. So to invest offshore you get the benefit of a stronger currency, particularly in the U.S., but you get these choices of just so many other companies that you just don't have in Australia and without it.

SPEAKER_06 11:55

So what about Michael's point about um are we overexposed if we've got U.S. stocks and it's just feeling a bit shaky?

SPEAKER_02 12:03

I get the tone of your comment here, Michael. I think it's i important as an investor that you can't combine political or those sorts of values with what's going on in investment markets. In fact, it's pretty much people don't want to hear this, but it's pretty much given that the more you hate a particular party or president in in there, the better the share market goes. It's really counterintuitive. Markets don't care. At the end of the day, they don't care. What they care about is companies that grow. So politicians and policies and those sorts of things come and go. I grant you that in this case the U.S. is dealing with policies and that which are right, you know, far right and are difficult and some uncertain, but markets have a way of dealing with that very efficiently. My view would be is we need to discount those sorts of matters when you're dealing with investments. Other parts of your life, I get it, but with investments, it's really difficult.

SPEAKER_06 12:59

And just on superannuation, then, if you're in one of their balanced or growth portfolios, would we assume that they would have diversified their international stocks as well, not just all 100 percent in U.S. stocks? Trevor Burrus, Jr.

SPEAKER_02 13:10

They they would have exposure to international shares, you know, every all the way. And and don't forget that our top in our top 20 Australian companies listed here, more than half basically sell all their goods and services offshore, whether it's CSL or BHP. These companies really don't have much business in Australia at all.

SPEAKER_06 13:30

Michael, fantastic question. Thank you so much for calling in on ABC Radio Melbourne. We're doing on the money right now, and Romo Greco is in the house. He's our share market specialist. Taking another call now. So this is

Pay Off Mortgage Renovate Or Move

SPEAKER_06 13:42

Marika. Good morning, Marika.

SPEAKER_01 13:43

Hi.

SPEAKER_06 13:44

Hi.

SPEAKER_01 13:45

Um yeah, my question, um, I've received a small inheritance which will pay off the rest of my mortgage, and I have a little bit left over. I'm wondering, am I better to um renovate my house for more aesthetic reasons, or am I better to um sell and buy a new place which has already been modernized?

SPEAKER_02 14:06

Oh, in terms of uh flipping a property, that's interesting. Yeah, I'm not sure whether I'm potentially the right person to ask that.

SPEAKER_06 14:14

What's the right questions that Marika can ask herself about that, I guess?

SPEAKER_02 14:18

Changeover costs, you know, stamp duty and those sort of things, uh trying to balance the sale together with a purchase, real estate costs. You know, dealing in property is really very high friction. We call it high friction. There's a lot of barriers and costs. Um I would look at your existing property. If you're going to make a further investment in renovation, does that add value to the property? That's your first port of call. That's a bit of a guess, but you can have some some guess there. Or then look at finding a new property that's already renovated. My gut feeling, and it's just a gut feeling or guess here, is that often when you buy something that's already renovated, it's probably better. Like you get a reasonable deal. People renovate and then sell, but I don't think you ever get the value, the the the sweat and tears you put in in renovation, then you sell it to somebody else. I often think that they get the benefit rather than you. So I think that's something maybe that's just philosophical about it. But I would think the biggest issue for you is just the changeover costs with Stamp Duty are so prohibitive in Victoria.

SPEAKER_06 15:15

Thank you so much, Marica. Uh and good luck with that. Um Okay, this

Bonds Safety Versus Return

SPEAKER_06 15:21

one. Luca says, Hi Remo, I need to sell some bonds. I've been they've been held over ten years, wondering if it's generally better to keep the capital guaranteed ones or ones moving with the market. E.g. Australian Unity Centuria. Thanks, Luca.

SPEAKER_02 15:36

Do you want to just give us a bonds kind of So I'm assuming you've got government bonds which are, you know, essentially a risk-less asset or really high quality, and you're suggesting do I move into something with a s with a bit more higher risk to get a bit more return? That's the age-old question we deal with every day we wake up, is trying to work out how much of our neck we want to stick out that window before we get it chopped off, and that's really the hard point. I would argue that with markets recovering so well since COVID, so we've had five years of pretty good markets, you would probably be erring on the side of a bit of caution here, all things being equal. So I would think that being perhaps in the safer part of those bonds rather than looking to get a higher return may be the way to go. Without getting wonky, high quality bonds where interest rates are falling. So if interest rates are falling, and that's the guess at the moment, high quality bonds tend to do quite well. I think you probably need a little bit of advice around this because it's perhaps something that needs some careful consideration before you make the move.

SPEAKER_06 16:42

Thank you. Uh this one from Peter. Hello,

Franking Credits And Retiree Income

SPEAKER_06 16:45

Peter.

SPEAKER_03 16:46

Oh, good morning.

SPEAKER_06 16:47

Good morning. You've got a question from Remo.

SPEAKER_03 16:50

I have. Um look, I've been retired several years. I have a self-managed super fund um with quite a few shares. So I'm interested in income. So I'm I'm not that keen on overseas shares because I don't get the benefit of the franking credit. Does does that make sense?

SPEAKER_02 17:08

That's uh that would be probably the single biggest issue that most uh self-managed superfund and retirees face there is that is the value of franking credits. Um I think that's really important, I agree, but not the only game in town. If you think about it, Commonwealth Bank is yielding three percent plus a bit of franking, you might get five. Um at the moment you can buy a property trust, a really high quality property trust that's given you a seven return, plus probably a lot more growth. That's the trade-off that we're trying to deal with all the time. So, yeah, franking is important. I agree with that, but and it with interest rates going down, perhaps, that's a guess, that means that those dividend yields plus franking become more valuable. Um that's probably a positive there. But I think a good diversified portfolio where you're chasing both, particularly in the self-based superfund, does make a bit more sense to be a bit more diversified.

SPEAKER_06 18:03

Thank you so much. Peter, for your call. I've got a two quick test texts here for you, Remo.

Sigma Price Surge And MinRes Alarm

SPEAKER_06 18:08

So I want to deal with Sigma warehouse. Um so Jan has called in from Kuyong saying re-Sigma warehouse merger, in quotation marks. Sadly, I've been holding a small quantity of Sigma shares for many years. Can you predict what is likely to happen to the Sigma share price as a result of the merger? Thank you for your segment.

SPEAKER_02 18:28

Well, I don't think we need to look at the prediction. The share price has just gone absolutely bananas from a dollar to three dollars really quickly. So there's a lot of optimism already placed in this share price. It depends on your time horizon here. If you've got five years ahead of you, these things are probably going to do all right. Um if you're looking for the next five months, maybe not.

SPEAKER_06 18:47

Okay, thank you. And then Pauline is asking about mineral resources. Can you comment on that one?

SPEAKER_02 18:53

We could do a whole show on mineras. This is a really significant problem that's going on. It's a very, very large mining company. Uh the share price has fallen from eighty dollars down to about twenty-five. It's got a lot of debt. There's a lot of problems with the board. It is probably the single biggest talkabout issue going on in share markets in Australia at the moment. How a great company that's owned by many, many super funds and the big end of town have been chopped uh in half here. The stock is in a lot of trouble here. There's a lot of debt, and debt always makes good ideas turn bad. So need to be very, very careful with this company. Uh it'll survive, I suspect, but boy oh boy, it's very uncomfortable for the big end of town.

SPEAKER_06 19:31

Maybe we will do a watching brief on some of these.

SPEAKER_02 19:34

Yeah, this is certainly in our what's not hot section, Lisa. It is certainly a really big issue going on in the share market at the moment.

SPEAKER_06 19:40

Thank you so much, Remo Greco.

SPEAKER_02 19:42

Pleasure.

SPEAKER_06 19:42

Remo Greco there. Financial advisor with Sandland Private Wealth. And that was On the Money. And Remo will be back in good time.