Numis downgrades SIG, says recovery still in 'early days'

Analysts at Numis downgraded their recommendation on shares of SIG from 'hold' to 'reduce', saying the shares' valuation was up with events even while conceding the "good" recovery profile the company's shares offered.

In their judgement, the stock's valuation looked "high" solely on the basis of the insulation and roofing materials supplier's last interims.

Furthermore, they believed the profit recovery in the UK needed to be focused given that the headwinds facing the company might offset the "substantive changes" carried out by management.

The scope for margin improvements in the UK appeared "very limited" from current levels and the long-term trends had not been positive.

They also highlighted the company's relatively high-exposure to the non-residential market - which accounted for roughly 38% of its sales in Britain - which entailed some macro concerns from 2018 onwards.

On the other hand, during the first half of 2017 SIG had a "very strong" performance in Europe, especially in the French market, but margins there were already at "attractive" levels.

So since the business was not "broken", the broker saw limited scope for recovery.

It was "early days", the said, nonetheless the fact that the UK needed to be the major shift in profitability was a risk.

On top of that, magement's track-record when it comes to slashing operating expenses "was not good".

"It remains to be seen if this reflected structural and industry aspects alongside a failed strategy."

Moves to downsize the company might also result in the recovery potential being overstated.

Despite all of the above, Numis kept its target price at 150.0p.

"Short term valuation is high and, while that is to be expected given its recovery status, based on long term P/E and EV/sales to EBIT margin trends, the share price is building in recovery, which in our view seems very early and possibly risky given our concerns."