SIG underlying growth flat for first half, replaces auditor

After the Financial Reporting Council last week launched an investigation into Deloitte’s audit work on SIG's accounts for 2015 and 2016, after company admitted overstating profits, SIG said it had appointed Ernst & Young as a replacement. EY's record is not unblemished, however, having been fined last year by the FRC for historical audit misconduct.

On its performance for the first half of the current year, the FTSE 250 group said group revenues from continuing operations had increased by 0.6% at the reported level, with currency swings contributing 1.4% but offset by 0.8% due to fewer working days compared to last year.

On a like-for-like basis, first-half sales for the group were almost perfectly flat compared to last year, and that as long as there is no further deterioration in UK market conditions, management are confident of reaching their underlying profitability targets for the full year, though they have chosen not to share these publicly.

Management reiterated their confidence in delivering a "significantly stronger second half to the year", with "meaningful cost benefits" in the coming six months to mitigate the adverse impact of weather on UK sales and profit in the early part of the year. City analysts are on average forecasting a full year profit before tax close to £81m.

"Trading conditions remain mixed across the group's markets, with continued confidence across Mainland Europe and Ireland but ongoing challenges in parts of the UK construction sector, particularly commercial new build and RMI markets," the company said in a statement on Wednesday.

"Providing there is no further deterioration in UK market conditions, our expectations for underlying profitability for the full year remain unchanged."

Challenging conditions in parts of the UK construction sector saw revenues fall 3.1% in the first half, which is an improvement from the 4.4% in the weather-affected first four months of the year.

While Ireland goes from strength to strength, the decline at the distribution division, which is focused on insulation, worsened to 2.7% for the first half from 2.2% in the first quarter, while the exteriors arm, which supplies roofing products, was down 7.1% compared to 10.6%.

Meanwhile, LFL sales in mainland Europe grew 2.9%, compared to 3.8% at the start of the year, due to slowing of growth in France, Germany and Poland. Air Handling and Benelux segments both improved slightly.

SIG also noted that debt and leverage are expected to show year-on-year improvement at the half-year stage, with headline financial leverage between 1.0 and 1.5 EBITDA during 2018.

Shares in the company dropped on Wednesday, but regained some territory to stand 1.2% lower at 136.8p by 0930 BST.

Broker Canaccord Genuity said the update was broadly as expected, with management leaving its expectations for the full year profits unchanged.

As leverage remains a key priority, analysts predict there could be a few more disposals by the end of the year, with circa 10% of the 13% of sales identified as potential disposals now done.

"While there remains uncertainty on the trading outlook, leverage does look under control. The group needs to deliver some meaningful self-help from the second half, as promised, for the shares to re-rate on confidence in the turnaround story in our view. Overall the update is broadly as expected; albeit released a day earlier than expected to coincide with the announcement of a new auditor today (Ernst & Young). We think consensus is unlikely to change materially."