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SIG increases spend to get its house in order

Rebuild of UK distribution arm looks to put decision-making power back in branches
September 22, 2021
  • Cash outflows recorded as it secures supplies in tight marketplace
  • Improving margins will feed into full-year profit, finance director says

SIG (SHI) is no stranger to restructuring. The Sheffield-based distributor of building and roofing materials has been through about a decade of them. The problem is, they haven’t been very successful. A focus on selling off unprofitable businesses and driving down costs led to it centralising operations and squeezing suppliers to achieve better deals. Its top line flatlined and, although it had some profitable years, the returns began to dissipate. “As everyone knows, you can’t run a business where you’re restructuring and shrinking the whole time. Eventually you just run out of road,” chief executive Steve Francis candidly put it.

SIG was certainly heading that way when he and chief financial officer Ian Ashton joined in February last year. It had lost market share, its share price had sunk and its debt pile had climbed to a level where it was in danger of breaching covenants even before the impact of Covid-19. Squeezed suppliers and disenfranchised employees were also unhappy, he added.

The company raised £165m last year to fund a ‘Return to Growth' strategy focused on decentralising decision-making back to branch managers, who are responsible for their own profit and loss. New product category roles have also been created to rebuild supplier relationships. This has paid off both in terms of rebuilding gross margins and ensuring access to materials, Francis said.

Reported revenue was up by a third on a 2020 half-year blighted by the pandemic, although only marginally ahead of the 2019 top line. Underlying gross margins improved by 100 basis points to 25.9 per cent, helping it to cut earnings losses substantially. However, its cash position closed £61m lower than at the beginning of the year at £174m as it sought to pay suppliers more quickly and increase stock levels in the face of industry shortages, most likely a prudent move.

Revenue for the second half is likely to match the first six months and, with progress made on margins, the company expects “a full-year profit of H1 times two, plus a little bit”, Ashton said.
Broker Liberum is one of only two (out of eight) analysts with a Buy recommendation on the stock. It has a target price of 65p, arguing SIG will benefit from changes being made to UK building regulations to make homes more energy efficient. The more cautious FactSet consensus estimate of 51.4p is not too far from its current share price given its 45 per cent year-to-date gain. With SIG expecting to increase cash flow in the second half to guarantee stocks, it seems sensible to wait until this rebuild is on firmer foundations. Hold.

Last IC View, Sell at 38p on 25 Mar 2021

SIG (SHI)    
ORD PRICE:44pMARKET VALUE:£519m
TOUCH:44-47p12-MONTH HIGH:62pLOW: 22p
DIVIDEND YIELD:NILPE RATIO:NA
NET ASSET VALUE:25p*NET DEBT:98%
Half-year to 30 JunTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2020 (restated)0.84-125-21.1nil
20211.11-1.60-0.70nil
% change+32---
Ex-div:-   
Payment:-   
* Includes intangible assets of £150.9m, or 13p per share