Investment Column: Materials supplier SIG is in a sticky sector

Topps Tiles; Aga Rangemaster
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The Independent Online

Our view: Sell

Share price: 182.25p (-36.75p)

Investors may be surprised to learn that the last month has been great for builders, contractors and those offering ancillary services to the industry: shares in the insulation and materials group SIG, for example, have jumped by more than 40 per cent.

But don't be fooled. The dire condition of the construction market has been well-documented, and while some think that the industry's collective share prices have hit their trough, the uncertain future of the British economy means that it would take a very brave investor to take a big punt on the sector.

In fairness to SIG, yesterday's trading statement had some encouraging news, including total full-year sales increasing by 24 per cent. The group is also making efforts to cut costs, and has added to the swelling numbers of unemployed by announcing the loss of 1,000 jobs and the closure of 80 outlets.

Sadly for SIG, things in the construction sector are likely to get worse before they get better. Housebuilding is almost at a standstill, and even though building firms are focusing attention on more non-residential work, including the public-sector projects that look likely to be funded from the Government's borrowing splurge, overall activity is likely to fall.

Gareth Davies, finance director, says that SIG will not breach its debt covenants, and that the overall amount owed to banks is falling. The shares, trading on a 2009 price earnings ratio of just four times, are cheap, say watchers at Panmure Gordon, who add that the wider building materials sector trades on around eight times. This is encouraging, but Panmure also warns that the dividend will be cut. Mr Davies says that a decision has not yet been taken, and despite protestations that the debt level is falling, analysts at Killick Capital point out that "at over two times market capitalisation, this remains a concern".

We are encouraged by the actions taken by SIG, but are concerned that it remains in a very sticky sector. The fact that the group is moving more and more work overseas will help, but we would expect the shares to come under pressure in the coming months. Yesterday's fall of 16.8 per cent is testament to that. Sell.

Topps Tiles

Our view: Sell

Share price: 26p (-3.5p)

Analysts at the house broker, KBC Peel Hunt, reckon that the tile and flooring retailer Topps Tiles will benefit this year by picking up market share as smaller and less financially sound firms go to the wall. Maybe, but the other way of looking at Topps Tiles is that the last year was a shocker, and with the worst of the slowdown still to come – technically, we are not in a recession yet – 2009 is set to be a tough 12 months.

Yesterday's interim management statement was at best gloomy. Revenues in the first 13 weeks of the financial year, including Christmas, were down 13.3 per cent on a like-for-like basis, despite trading being broadly in line with expectations. The stock fell 11.9 per cent in trading yesterday, adding to the 78 per cent decline over the last year.

Matt Williams, chief executive, says that the group is doing its best to manage costs and that the company will certainly be part of the high street in a year's time. However, the fact is that those worried about looming redundancies are not about to fork out for a new bathroom suite, while a static housing market hardly helps.

There is support for the group. KBC argues that given Topps' net cash inflow of £14m this year, like-for-like sales would have to fall by 27 per cent for the company to reach cash breakeven. The fact that the house broker is even talking about cash breakeven does lend weight to an argument not to buy the stock.

The sad fact is that 2009 is set to be a hard year for Topps and others like it. It would take a very brave, or foolish, investor to buy the stock today. Sell.

Aga Rangemaster

Our view: Avoid

Share price: 55.25p (-6.5p)

If ever there was a symbol for achieving middle-class status it must be to have an Aga cooker stationed in the kitchen. When things are going well, therefore, the maker of the ovens, Aga Rangemaster, can watch the cash roll in, but according to analysts at Numis, the group is in the "eye of the storm" now that a downturn has hit.

The group is dependent on discretionary sales as much as any other. The chief executive, William McGrath, says that with cash of £5m in the bank and the workforce cut by 12 per cent on the level at the start of 2008, the group is in good shape. Yesterday's trading statement, however, said that "operating profits in the second half of 2008 were appreciably below those achieved in the first half of the year".

Aga is still in solid shape and with a weakening pound, exports should be boosted. The market for new buyers, however, is diminishing. Avoid.

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