Canaccord not ready to give SIG the 'benefit of the doubt'

Analysts at Canaccord Genuity said on Friday that the investment case for SIG continued to hinge on the success of its turnaround strategy to improve profitability and returns even while reducing leverage.

The Canadian broker felt that SIG's management was "doing a good job" of reducing leverage, expecting the firm's indebtedness ratio fall below 1x in 2019 thanks to recent disposals.

While SIG did not target an actual year by which to reach its operating margin of 5% and return on capital employed target of 15%, Canaccord now forecast the targets would be reached by 2021 at the earliest, rather than in 2020, as trading conditions remained "challenging" in the UK and the group's historical mismanagement would take time to rectify against a mixed market backdrop.

With leverage looking increasingly under control, assuming that markets do not deteriorate significantly and that management starts to deliver "meaningful self-help" from the second half the year, Canaccord said SIG's shares looked "well-positioned" for a re-rating to reflect "increased confidence in the success of the turnaround".

However, even as Canaccord recognised the lack of recovery priced into SIG's shares, the broker stood by its 'hold' rating on the firm until more evidence of margin improvement coming through from self-help was seen.

"The shares have performed very poorly year to date, down by c.20%. We continue to believe the shares could potentially exceed 200p over the medium-term if management delivers margins close to its targeted 5% but the market will likely need to see evidence of this before giving the benefit of the doubt," said Canaccord's analysts.

In addition to reiterating its 'hold' rating, Canaccord dropped its target price on SIG to 155p from its previous 165p mark.