Short of the Week: SIG [LSE: SHI]

The Brexit deadlock may be over but the nightmare after Christmas is here for building supplies specialist SIG (LSE: SHI). SIG shares took a tumble on 9 January following a profit warning, dropping by 20% as the firm admitted that sales had been deteriorating on the back of a weaker economic outlook for the UK.

Is Brexit to blame for SIG shares debacle?

Brexit probably has a big role to play in all this. A building supplies company like SIG will have a good feel for what is happening in the construction sector as builders like to order materials in advance. Look around the London skyline, however, and you may be forgiven for thinking that the British building trade is as busy as ever, but SIG is also looking towards future projects and orders in 2020, and if there is going to be that nightmare after Christmas for SIG, the decline in orders is the smoke before the fire.

Savvy traders are asking themselves, is there going to more bad news forthcoming? Since the middle of January the number of short positions on SIG stock held by major European hedge funds has been building, with net short interest topping 7%.

SIG told the market that it expected underlying pre-tax profit to come in at around £42 million for the 12 months to the end of December. UK sales dropped 18% as the company sought to focus on higher margin work. Much of this bad news seems to have been priced into the drop in the shares in the second week of January. Why, then, are professional investors anticipating more problems?

SIG is selling stuff

SIG is also selling things, including its air handling business and its building solutions operation. These are both deals it expects to close by the end of the quarter. It is being bullish about the impact of what it is calling ‘profit protection actions’ which it thinks will start to make themselves felt in the course of 2020.

Some analysts are worried that drastic measures being taken could compromise essential relationships that SIG is going to need when the market recovers from the Brexit turbulence – if it recovers. What is patently obvious is that the profit warning hit the share price of some of SIG’s key competitors, among them Grafton, Kingfisher and Travis Perkins. This means investors are taking a bearish view of the prospects of the overall UK construction sector. The worry is that we may be in for a Brexit deep freeze in the building trade.

SIG also has a rap sheet when it comes to overstating things on the upside. It admitted over-egging its profit figures for 2016-17, for example. There is an ongoing investigation by the Financial Reporting Council into Deloitte’s audit of the 2015 and 2016 accounts.

The 12-month high for SIG shares was in May, when they stood at 153p. At the time of writing they were trading at 94.8. They currently look relatively rangebound as the market continues to digest the bad news, but the build up in short interest is a strong indicator that we could see further downside from SIG. Full year results for 2019 are due out on 6 March.

Make sure you sign up for The Armchair Trader’s daily market update for further discussion on short and medium term bear trades.