SIG sees silver linings in Europe as UK 'increasingly challenging'

SIG, the building products supplier, reported a 10% decline in underlying profits, a statutory loss and cash flow down by a third as the UK market becomes "increasingly challenging".

However, due to a more buoyant mood in Europe and Ireland, the FTSE 250 group "see considerable potential for a significant improvement in operational and underlying financial performance" for 2018.

Having this year uncovered, thanks to a whistleblower, accounting irregularities in its distribution division for the 2015 and 2016 financial years, these have been restated and auditors have confirmed no further cause for concern.

For 2017, revenues of £2.8bn were up 7.4% on the prior year, with like-for-like sales improving 3.8%.

At the underlying level, excluding property profits, SIG reported an underlying profit before tax of £65.5m. At the statutory level the group fell to a £51.2m loss due mainly to £72m of impairments and losses on the closure of non-core businesses.

Distribution, the specialist UK insulation and interiors distribution business, increased revenue 2.1% to £797.5m but underlying operating margin almost halved to 1.2% to drag underlying operating profit down 46% to £9.9m. Exteriors sales were down 1% to £409.5m and profit fell 17% to £25.2m when not including property profits.

But underlying profit before tax was boosted to £79.2m, up 4.3% on the year, thanks to property disposal profits of £13.7m. A final dividend of 2.5p per share lifted the total payout to 3.75p, up on the 3.66p from a year ago.

In Ireland profits grew 30% to £4.8m but at a statutory level it reported an operating loss of £39.9m.

Mainland Europe recorded £1.5m of revenue, up 13% or 5.9% on a LFL basis. While gross profit margin shrank by 10 basis points to 27.4%, underlying profit margin improved by 30 basis points to 4% and the continental division delivered a £59.4m underlying profit and £41m at the statutory level.

Chief executive Meinie Oldersma said, if including the benefit of property profits it was SIG's first improvement in underlying operating profit for three years.

He pointed to progress made in stabilising the business, returning SIG Distribution to underlying profitability, rationalising the loss-making UK offsite construction division, beginning to "get a grip" on operating costs and working capital and making "significant steps" in refocusing the portfolio with the exit from eleven businesses that has seen net debt shrink to £223.8m at the year end from just under £280m a year before.

There was negative free cash flow of £3.2m in the year and cash inflow from trading fell 34% to £62.8m. Looking forward, the outlook was mixed, Oldersma said: "As the group moves into 2018, we are seeing increasingly confident markets across Mainland Europe and Ireland, but also the first signs of capacity and labour constraint in buoyant construction markets. In contrast, we are seeing an increasingly challenging environment in the UK created by macro uncertainty and recent events in the construction industry.

"Notwithstanding this outlook, we see considerable potential for a significant improvement in operational and underlying financial performance, with execution largely within management's control, and we are working hard to ensure effective delivery."

SIG shares rose 5% to 158.5p in early trading on Friday.

"On an underlying basis revenue was slightly better than our forecast," said broker Shore Capital, "whilst PBT, EPS and DPS were slightly below.

"However we note that underlying PBT of £79.2m as reported by the company includes property disposal profits of £13.7m which is significantly higher than we had anticipated."