ISG looks dirt cheap

Five months after a savage profits warning then dire set of half-year results just four weeks later, builder and office fit-out firm ISG has reassured shareholders that full-year results will be no worse than heavily-downgraded forecasts. It will pay a dividend, too, following a strong second half, and is optimistic about 2016.

Investors certainly appear willing to forgive. ISG shares had lost as much as 60% of their value between January and early April, plunging to 140p at their nadir. However, they’re up 4% Tuesday as management's bullish tone hints at a recovery in progress.

At least bosses have not been idle. After warning that troublesome construction contracts would cause a £7 million profits miss, and flagging £6 million of extra costs and making an £11 million provision for shutting its Tonbridge office, they quickly raised a net £15 million at 170p.

Now, ISG says results for the year ended 30 June 2015 will be in line with reduced expectations, although it does admit its estimates may be out by up to £2 million. That's because chiefs are still thrashing out terms on the older loss-making construction contracts which caused the profits warning in February.

"We believe the poor performance and painful restructuring of the UK Construction division is now behind us," they add.

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Expect a reported full-year loss of £23.3 million following a further £10.5 million of provisions announced Tuesday, says Numis Securities. The broker pencils in a 39% slump in pre-tax profit to £7 million on revenue up 18% at £1.7 billion. We'll get confirmation on 8 September. It does, however, maintain forecasts for profit of £18 million and revenue of £1.8 billion in 2016 as trading conditions improve.

And they already are. "The overall performance of our specialist fit out, engineering services and retail businesses in the UK and internationally has been excellent and trading has been ahead of management's expectations," cheered ISG. "This provides a firm basis for our confidence in the Group results for next year, supported also by a turnaround in UK Construction where performance of the pipeline of new contracts procured over the past eighteen months is meeting management's expectations."

The order book is up 6% at £1.1 billion, over three-quarters of which relates to work in 2016, and demand in its core sectors remains "strong and stable". ISG won £80 million of commercial office fit out projects in the three months to June, too. The share placing in March also means ISG has £50 million of net cash and management has promised an increase in the final dividend to 5p.

At 169p, ISG shares trade on 6.2 times Numis estimates for 2016 earnings per share (EPS) of 27.3p. There's a prospective yield of 5.6%, too. "The shares look materially too cheap," cries Numis analyst Howard Seymour. "In our view, the current share price fails to reflect the reduction in both the risk profile and our estimates of a materially improved profit position in 2016 and we therefore remain buyers."

Seymour believes the shares will be worth 345p. At that price they would trade on 12.6 times forward earnings, not unreasonable for the potential growth on offer. Remember, too, that Numis forecasts year-end 2016 net cash of £63 million compared with a company currently worth just £84 million. Strip that out and the underlying business is valued at just 1.5 times earnings.

The stats certainly look appealing. That the shares appear so undervalued implies many in the market do not. This, however, does not look like a value trap and these will be proved to be bargain levels if ISG does the numbers next year.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.