Raffles378 provided an excellent write up on the business two years ago after the Company was recapitalized by CD&R and an emergency turnaround plan was put in place by then CEO Steve Francis. Since the initial writeup, SIG has made excellent progress on its operational turnaround, reversing a multitude of self-inflicted mistakes that over-centralized key business functions and compromised local service quality and branch manager autonomy. The prior misexecution resulted in a multiyear period of significant share losses and profit erosion that are now clearly turning, yet still in the early innings of their delivery.
In 2020, the Company laid out an intermediate target of achieving 3% operating margins by 2023. Those targets were achieved a year and a half ahead of schedule, and management has since upgraded medium-term operating margin targets to 5% which they expect to achieve within the next few years. The 5% margin target would restore SIG's margins to historical levels, prior to the onset of SIG's execution mistakes, and would bring margins to parity with competitors. More than half of the portfolio (UK Exteriors, France, Poland, Ireland) is already operating at ~5-6% operating margins and Management is focused on driving ongoing improvements as well as bringing up margins in laggard markets (UK interiors, Germany, Benalux).
The performance turnaround at SIG has been broad-based. Nearly every sub-market is now gaining share and improving margin, demonstrating the momentum of the current turnaround. Despite this obvious progress, I believe shares continue to be overlooked primarily due to macro (an out-of-favor cyclical given recession fears), technical factors (low-float small cap with ~45% of shares held by CD&R and IKO), and the general undervaluation of the broader UK market right now (cheapest equity market in the developed world).
CD&R, who is SIG's largest shareholder and has two partners on the Board, shared their perspectives on SIG during a recent podcast (
https://www.moneymazepodcast.com/podcast/david-novak). The conversation emphasized a few key points: (1) CD&R has a lot of institutional expertise in construction product distributors, (2) their history with SIG goes back over two decades, (3) they were given the opportunity to perform inside diligence on the business which gave them confidence that margins could return to ~5-7% historical levels and (4) they view the business as an M&A consolidation platform. After making their initial investment and joining the Board in May 2020, CD&R increased their stake again in late 2020, indicating their increased conviction in the opportunity. Other insiders have bought shares as well.
Steve Francis is a turnaround specialist who was appointed as CEO right at the onset of COVID to help stabilize the business. While Steve Francis has done an excellent job driving the initial turnaround, I believe the Company has brought in an excellent CEO in Gavin Slark (effective February 2023) who will continue to drive SIG's turnaround strategy forward. Gavin is a well-respected CEO who had an excellent 11-year run as CEO of Grafton Group, another UK building products distributor, where he increased operating margins from 3% to 7.5%, expanded geographically, and completed 15+ tuck-in acquisitions. Shares appreciated by ~3.5x over his tenure, significantly outperforming the UK building product peer set. The European distribution market is still highly fragmented (SIG only holds a ~10-15% share in its markets) and a well executed roll-up strategy should be accretive.
Putting this all together, I believe shares can triple in the next 3 to 4 years as the Company continues its momentum and closes on its ~5% medium-term operating margin targets. Assuming ~£3B of revenues by 2025 / 2026, a low-single-digit revenue growth CAGR from 2022, a 5% EBIT margin (translating to ~7.5% EBITDA margin), de-leveraging / FCF generation, and at a historical ~8x EBITDA multiple, SIG's shares could yield a share price of £120 per share by 2025, with additional upside from accretive M&A.