QuickView - SIG Plc

A new CEO does not herald radical changes at SIG Plc (SHI:LSE) but brings experience to maximise benefits from greater co-ordination across and between group operations. At anytime this looks logical but in flat to soft markets it means SIG is capable of making further progress in FY13 and beyond without waiting for the wind to change direction and EPS growth should gather momentum.

Self made progress
None of SIGs markets grew in FY12 and, on an unweighted average, were down 2.5% but SIG held its top line in constant currency - with price inflation (+1.2%) offsetting volume decline again gaining market share. Incremental margin gains were not quite sufficient to offset weaker euro translation, leaving reported EBIT c 2% lower y-o-y at £96.5m. The three largest countries (UK, France, Germany – together 86% of group revenue) improved gross margin. Cash conversion was again above 100% and with net capex slightly ahead of depreciation, free cash flow was £33m. Dividends (c £15m) and deferred consideration (c £13m) swallowed most of this but net debt came down again to £105m (less than 0.9x EBITDA).

Strengthening internal pillars to magnify network gains
In the near term, tactically, we expect SIG to remain responsive to local volume and pricing trends. Its medium term objective is to develop gross margin and grow profits to further improve ROCE (FY12 8.6%) to 300bp above WACC. Anticipated soft markets and in the absence of an intended uplift in acquisitions, further debt reduction, make this moving target challenging. Under new leadership we expect a period of introspection (strategic update to come later this year) but the direction of travel is clear. The new CEOs retail background will underpin a drive towards smarter group functions (eg re-branding, sourcing, IT enhancement, inventory management) that improve the customer (and competitive) proposition and increase support function efficiency. Refinement of the branch network is ongoing.

Valuation: Accelerating EPS growth to increase attraction
Like others, SIG’s share price has travelled well from lows of c 82p in the middle of last year. The current P/E does not scream value but EPS growth could surprise on the upside (and weak sterling helps) and a rising dividend profile looks assured.

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