SIG shares drop as UBS downgrades rating to 'sell' after weak construction market hits revenues

UBS lowered its rating on SIG to ‘sell’ from ‘neutral’ and cut its target price to 100p from 127p.

Brexit uncertainty and a slowdown in the housing market has dampened UK demand

SIG PLC (LON:SHI) shares dropped on Thursday after UBS downgraded the stock, saying macro-economic headwinds is likely to delay the building material supplier’s turnaround ambitions.

UBS lowered its rating on SIG to ‘sell’ from ‘neutral’ and cut its target price to 100p from 127p.

The investment bank said it sees a 10-15% downside risk to consensus estimates for fiscal years 2019 to 2020.

“We have become more cautious after SIG reported a sharp decline in like-for-like revenues at the end of 2018 which we expect to continue in FY19 and delay SIG's EBITA margin recovery to 5% (mid-term target),” UBS said.

READ: SIG shares in the red as revenues hit by tough construction market

Earlier this month, SIG said it expects to report adjusted pre-tax profit of £75mln for 2018, down 5.3% from the £79.2mln posted a year ago and below market forecasts of £76mln.

Total like-for-like revenue dropped 2.3% in the year as UK demand for commercial construction was dampened by Brexit uncertainty and a slowdown in the housing market.

“We believe the recent slowdown in the European housing market as well as continued weakness in UK commercial construction (see inside the note for more detail) were well flagged in SIG's LFL revenue decline implied in Nov-Dec of -10% year-on-year in Germany, -9% in the UK and -6% in France,” UBS said.

“While part may be attributed to churning unprofitable clients, we think SIG is also losing market share involuntarily.”

UBS said with SIG still focused on deleveraging, it believes cash conversion will be prioritized while margin improvement “somewhat delayed”.

The bank now estimates a 3% drop in like-for-like revenue in 2019 and flat like-for-like revenue in 2020. That compares to management's initial market growth assumptions of around 2% per year over 2017-20.

“For 2019, we see -10% downside risk to consensus pre-tax profit of £90mln, which we believe implies an acceleration in pre-tax profit growth to +25% year-on-year from +9% year-on-year in FY18,” UBS said.

In late morning trading, SIG shares declined 3.2% to 116.7p.

Quick facts: SIG PLC

Price: 30.48 GBX

Market: LSE
Market Cap: £360.14 m

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