SIG PLC (LON:SHI) chief executive Stuart Mitchell may have walked the plank after a profit warning, but pressures are likely to persist, Liberum reckons.
The distributor of building materials parted company with Mitchell on Friday after downgrading market expectations on full-year profits. Liberum thinks the consensus estimates on profit before tax will drop by around 15% for the current year.
The broker’s best guess for the reason behind the significant fall in SIG's gross margins is competition from Travis Perkins’s CCF business, which is exploiting its superior buying terms.
“This pressure is unlikely to ease and so we cut our 2017E estimates to below our new 2016 estimate, as we expect cost savings to be swamped by the full year impact of the fall in gross margins. The shares look cheap but will need a strong new CEO to restore the group to growth,” Liberum said.
The broker has cut its target price from 110p to 88p, which equates to around 9.5 times projected earnings for per share for 2017. The shares slumped on Friday from 115.8p to 91.83p, so the target cut mainly reflects that movement in the share price; the rating stays at ‘hold’.
Blue-blooded broker JP Morgan Cazenove is also neutral on SIG, but its price target is slightly higher at 120p. Its view is that the current valuation adequately reflects the balance of risks to earnings.
“While the group continues to execute on its cost savings plan and continues to bolt on acquisitions, markets remain tough, owing to competitive pressures and underlying weakness in demand. While the promise of eventual operating leverage means the long-term earnings upside story always looks attractive, we worry that we may see further near-term downside to earnings. While Mainland European markets are showing some early signs of recovery potential, we worry there is scope for the group to underperform in the same way it has in the UK,” Cazenove said.
Deutsche Bank completes a trio of fence sitters, slashing its price target from 116p to 100p but sticking with its ‘hold’ rating.
“Despite trading at a discount to peers, we see limited value given SIG’s higher risk profile (strategy implementation, management changes),” the bank said.