In upgrading SIG PLC (LON:SHI), the building products distributor, Liberum Capital Markets has gone straight from ‘sell’ to ‘buy’, despite an unchanged target price.
The broker believes there is significant potential for the new management team to eliminate inefficiencies and hit its target of lifting the operating margin to 5% from its current level of 2.9% (excluding property).
READ: SIG reports first profit improvement in three years as Europe recovers, but UK still challenging
“The group's overheads are very elevated against its own history and against peers, suggesting there is much inefficiency to eliminate,” Liberum said.
Taking a prudent stance, the broker has cut its earnings per share estimates by around 6%, putting its forecasts on or around the consensus forecast but believes the current share price of 142.7p – up 6.2% today following Liberum’s upgrade – prices in very little recovery.
Liberum reckons the shares are worth 157p, at which price the enterprise value (EV) of the company – essentially, the market capitalisation of SIG adjusting for cash and debt – would still only be 25% of annual sales.
Even this valuation does not fully price in the recovery potential of a company that has a chief executive officer at the helm who is in his 13th turnaround situation and who has experience in distribution.
There are risks to the recovery, most notably demand for non-residential construction, but Liberum reckons the risk/reward balance is now much better than it was.
Leading distributor of specialist building products within Europe, @SIGplc have a product offerings in 3 core product areas of Insulation and Energy Management, Exteriors and Interiors.. Download their #Revit families for building products here: https://t.co/bO87WmyZ9J pic.twitter.com/BhQvLIhhZu— bimstore (@bimstore) May 30, 2018