SIG not insulated from misery

SIG is a well run company specialising in niche construction products, such as roofing, partitions and brickwork support systems. It is also Europe's largest supplier of insulation products, with the group's revenue stream split roughly half and half between the UK and mainland Europe. As such, SIG is well placed to benefit from the long-term drive to save energy.

There are snags, however. SIG's short-term progress will be hit by lower state spending and less private construction. Progress this year was dealt another blow when snow and ice badly affected business in January and February. True, some of the work lost was recovered as the weather improved, but some was lost altogether. And when the drive to cut back on spending really starts to kick in, inevitably a lot of green-related spending initiatives will be re-classified as discretionary and therefore subject to cut backs.

Even so, the main distribution and merchanting division, which accounts for 88 per cent of group turnover, saw monthly sales towards the end of the first half showing a marginal improvement on a year earlier, with second-quarter sales growth of 2 per cent. This comes despite a continued fall in non-residential construction, which SIG's bosses reckon is unlikely to return to growth until next year. In fact, the division's better tone came from a return to modest growth in residential markets. But, here again, the improvement is fragile at best. Incentives to build homes are being cut back, mortgages are still hard to come by, and the UK's unemployment is set to rise further. And house prices are starting to fall again, which leaves the outlook for the housing sector for the rest of this year looking grim.

This has led to an increase in competition for the products that SIG provides, which in turn has led to tighter pricing and a squeeze on SIG's profit margins. So, while there has been a significant reduction in the group's cost base, this has not been enough to offset the decline in sales volume.

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Elsewhere, revenues generated by UK interiors manufacturing and insulation installation (around 12 per cent of UK turnover) fell by 20 per cent, with management acknowledging that there are no signs of an imminent improvement. And energy management, where demand comes from fitting insulation to existing homes, was hit by a shortage of funds from Ofgem's carbon emissions reduction target initiative, and sales in the first half fell by 23 per cent. What's more, the interiors manufacturing division was subject to a restructuring that started in August 2009, and involved factory closures, production and process improvements. These changes remain ongoing and will take the rest of this year to complete. Consequently, SIG doesn't expect to see the benefits until well into next year.

And the situation in mainland Europe paints an equally sombre picture. Once again, bad weather hit construction activity, followed by some recovery, leaving first-half sales down by 3.1 per cent although the drop was diluted to just 1.4 per cent thanks to sterling's decline against the euro. Two bright spots came from France and Germany, particularly in demand for roofing products. Although here again, non-residential and insulation sales continued to decline.

SIG has taken steps to reduce the cost base, although some delays in the reorganisation of the manufacturing division and higher-than-expected fuel costs have slowed down the process. Even so, a firm hand on working capital management has helped to reduce net debt from £255m at the end of last year to £227m by the end of June.