SIG's recovery plan may need another kick-start

A couple of years ago, we wrote how SIG (SHI) had been through about a decade of restructurings as it attempted to tackle its huge debt pile, which had proved unsuccessful because asset sales to pay down debt could only go so far, and that eventually some form of investment was needed to fund growth.

The company got this in 2020, when it raised £165mn from investors to strengthen its balance sheet and fund a “return to growth” strategy. 

Unfortunately, growth has not returned – at least not in a meaningful way. A 17 per cent increase in its top line in 2022 was driven entirely by inflation. Margins have also been deteriorating. SIG reported an operating profit of just £4mn on revenue of £2.76bn for 2023 – a margin of 0.14 per cent. Even on an underlying basis, its operating margin declined by a full percentage point to 1.9 per cent, setting it much further back from its stated 5 per cent goal.

This isn’t entirely the company’s fault, given the deterioration in both the home improvement and the housebuilding markets. It argues that changes made since 2020 will shine through once the market recovers, pointing to an outperformance among peers.
 
But being the best of a bad bunch isn’t good enough for a company in its position. Net debt including leases crept up to £458mn, or 3.5 times underlying cash profit and higher interest rates meant free cash flow generation fell to just £4mn. Barring a major (and unexpected) pick-up in end markets, it will remain in a tight spot without a further fundraise. Sell.

Last IC View: Sell, 28p, 08 Aug 2023