SIG breakout could trigger further surge

Looking at SIG's share price chart, you'd think it had lost a fight with a wrecking ball. The most recent damage was caused by a profits warning that forced the building supplier's boss out the door. But after Friday's full-year update, the shares have just surged by 15%, breaking out of an established bearish trading channel. There's talk of a turnaround, but is this the real deal or just a dead cat bounce?

Well, group sales jumped by 11% in 2016 to £2.7 billion, although that does include a 6.9% boost from the weak pound - SIG does almost half its business in stronger euros - and nearly 4% from acquisitions. On a like-for-like basis, sales rose just 0.3%.

Crucially, however, business has got no worse, and that relief has sparked a 15% surge in the share price to 108p Friday. That's filling the gap left following the slump in November, when SIG warned of increased competition and delays to crucial construction contracts. Although weaker sterling boosted revenue, Brexit slowed trading.

There are no further shocks and the back-to-basics approach should (in-time) yield positive resultsAnd SIG, which had also warned on profits in late 2015, still thinks it made £75-80 million pre-tax profit last year, which further reinforces confidence that both business and the share price have bottomed out.

Trading on just 12 times forward earnings, even after today's rally, forecast profit growth cuts this to just 9.2 times for 2018.

"The pre-close does not signal a turnaround in the business," cautions Panmure Gordon analyst Adrian Kearsey, who has a 135p price target on SIG shares. "But there are no further shocks and the back-to-basics approach being adopted should (in-time) yield positive results.

"In the meantime, the 5% prospective yield is paying shareholders to hold the shares."

We'll have to wait for 14 March for the full-year numbers. Be wary that this will be Mel Ewell's maiden results as chief executive and he may want to get all the nasties out while he can still blame previous management. After four years at the helm, former boss Stuart Mitchell was shown the door following November's slump.

Like-for-like sales increased 1.1% in the UK & Ireland in 2016, as the positive start to the year was wiped out in the second half. Mainland Europe sales slipped 0.5%, weighed down by France and Germany, down 2% and 1.3% respectively.

Aims for 2017 are restoring customer focus, emphasising sales growth, and reducing leverageNet debt is expected to have been two times operating profit at the end of the year, flashing red above its 1-1.5 times target. Management is urgently focusing on cash generation, tightening capital expenditure and suspending its infill acquisition programme to ensure it can reduce its leverage. Ewell is taking the group back to its roots to ensure client services and sales are at its bedrock.

"2016 was a disappointing year for SIG," explains new the new boss. "While the competitive environment, particularly in the UK, was challenging, our transformational change programme, although taking the group in the right strategic direction, distracted us somewhat from our customers.

"Going forward we need to better balance business change with the day-to-day operations of the group. Our principal aims for 2017 are therefore to restore our customer focus, place an increased emphasis on sales growth, and reduce leverage."

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.