Share tip of the week: shield your cash from recession
By
Paul Hill Sep 25, 2009
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SIG, Europe's largest distributor of insulation and roofing materials, has seen its shares tumble 85% over the past two years, hammered by the collapse in the residential and commercial property markets. However, I suspect the worst is now over. Here's why.
Firstly, this is a cyclical industry, and there's anecdotal evidence that things have stabilised, with SIG moving from 'survival' in 2008 to 'recovery' mode now. Indeed, last week Kingfisher, Europe's largest DIY retailer, released upbeat news, with the chief executive saying that "consumers are changing priorities, are spending more time at home, and are focusing on making it more pleasant to live in".
I'm not anticipating a V-shaped recovery anytime soon, but it feels as if the slump is bottoming. Meanwhile, the fundamentals for energy-saving products, such as insulation, are still intact; coupled with rivals going to the wall and tighter building regulations, this puts SIG in a good place to benefit when sunnier climes eventually return.
SIG (LSE: SHI), tipped as a BUY by MF Global
In the meantime, trading will continue to be "extremely challenging", yet SIG has stayed in the black and generated positive cash flows. In the first half, stringent cost controls helped cut underlying net debt by a creditable £79m to £276m as at the end of June, despite a 17.5% fall in like-for-like turnover.
City analysts are forecasting 2009 sales and earnings per share (EPS) of £2.6bn and 8.8p respectively, putting the shares on a p/e multiple of 15.3. At first glance, this rating doesn't look cheap, but we need to look across the entire economic cycle. On this basis, assuming normal trading patterns return by 2011 – delivering operating profit (Ebita) margins of 5.5% on revenues of $3bn – then discounting back at 12%, the stock is worth between 180p to 190p per share.
SIG is not totally out of the woods. Profit margins (2.6%) are likely to stay under pressure in the second half, and there could be another lurch down in the group's main construction markets. All the same, with "new build showing some modest signs of stabilising" and with more cost savings on the way, overall the company's risk/reward profile looks positive for the more adventurous investor. In addition, rival IKO (a large Canadian roofing and insulation group) snapped up a 3.1% stake in SIG in July, which suggests a takeover bid is possible.
Recommendation: high-risk BUY at £1.35
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
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