Avoid SIG's weak growth prospects

Earlier this month, the building materials supplier said a deterioration in trading that had prompted an October profit warning had accelerated during the final two months of the year. During the second half of 2019 like-for-like sales fell 8.3 per cent, a sharp acceleration on an already worrying 3.8 per cent reduction during the prior six months. Brokers have had to slash forecasts to keep up, with EPS prediction down by about 55 per cent over the past 12 months for both the recently completed and current financial year.

In December, the IHS /CIPS UK construction purchasing managers' index (PMI) dropped to 44.4, its lowest level since the aftermath of the financial crisis a decade ago. Any reading below 50 represents a contraction. True, this may well mark a low point, but the roofing and insulation specialist caters primarily to the commercial market, which has been the worst affected. 

As well as uncertainty within the UK building materials distribution market, recent downgrades have reflected the impact of the disposal of SIG's air handling division. The benefit from the disposal is that it generates net proceeds of around £204m to reduce debt. At the end of 2019, net debt stood at about £162m and the company is targeting a net debt/adjusted cash profits multiple of 0.5. Leverage had already declined to a multiple of 1.4 at the end of June, from 1.8 a year earlier. But this ignores the group's significant, debt-like lease obligations that have a balance sheet value of £319m.

The businesses that have been sold by SIG to shore up the balance sheet have boasted higher margins than the core distribution divisions. This means further pressure on the underlying operating margin, which is already wafer thin, coming in at 2.9 per cent during the first half of last year, down from 3.9 per cent in 2015. However, underlying operating profits have been significantly higher than statutory operating profits for each of the past five years, which should test investors' faith even in the modest underlying margin figure. The company is trying to deal with the competitive marketplace with better pricing management and by withdrawing from unprofitable business lines.