SIG’s statutory losses widen in 2020

Amid the pandemic disruption to construction activity, building materials distributor SIG (SHI) saw its like-for-like sales drop by 13 per cent in 2020, to £1.87bn. While like-for-like sales collapsed by a third in the second quarter, the group recovered to 4 per cent growth in the final quarter thanks to strong demand from ‘repair, maintenance and improvement’ (RMI) customers.

The UK was more severely impacted by lockdown measures than Continental Europe. Like-for-like sales in the UK distribution business fell by a third, compared to just a 10 per cent decline in the French distribution business.

The overall drop in revenue translated to an underlying operating loss of £53m, versus a £43m profit a year earlier. Still, that is slightly better than the £57m-£61m loss the group had guided to in January.

On a statutory basis, SIG’s operating loss almost doubled to £168m, weighed down by hefty impairment charges and onerous contract costs.

The balance sheet is looking a lot healthier thanks to a £152m equity raise in July and the sale of its heating and air conditioning business. The group finished the year with just £4m of net debt (excluding lease liabilities), down from £165m in 2019, although this had risen to £36m by the end of February.

As per the conditions of its amended debt facilities, SIG is not distributing a dividend for 2020. It is aiming to reinstate a pay-out that is covered at least twice by underlying earnings.  

The group says that momentum from the fourth quarter has carried over into 2021, with continued growth from RMI markets in the UK and France. The group believes it will return to an underlying operating profit in the second half of the year, although it has warned of rising input prices and potential materials shortages. Broker Jefferies is forecasting a £3m underlying operating profit in 2021, rising to £39m in 2022.

SIG launched a ‘Return to Growth’ strategy last year in order to reverse what chief executive Steve Francis called “nearly a decade of contraction”. His company is now targeting an underlying operating profit margin of 3 per cent in the medium-term, and 5 per cent over the long-term.

While that sounds promising, as analysts at Jefferies say, “investors may require greater proof that the new strategy is working before giving credit to yet another "turnaround" plan.”

In the meantime, there are better ways to gain exposure to the construction materials market. Peer Grafton (GFTU) is profitable, paying a dividend for 2020 and also benefitting from the pandemic-driven home improvement boom. With regards to SIG, we’re sticking to our sell rating.

Last IC View: Sell, 26p, 30 Sep 2020