Investing.com -- S&P Global Ratings has revised its outlook on U.K.-based building materials distributor SIG PLC to negative from stable due to anticipated free operating cash flow (FOCF) deficit amid challenging market conditions. The ’B’ issuer and issue credit ratings have been confirmed, with a ’3’ recovery rating on SIG’s senior secured debt remaining unchanged. This rating indicates an expected recovery of 50%-70% in the event of a default.
The negative outlook is based on S&P’s forecast that SIG will generate negative FOCF after lease payments in 2025, despite a predicted modest recovery in EBITDA. This forecast is due to the expectation that SIG’s earnings will be utilized fully to cover net interest expenses, working capital, capital expenditure, tax, and lease payments. The company’s EBITDA would need to recover to at least £140 million-£150 million for a sustainably positive FOCF after lease payments, a scenario that relies on a significant market recovery in the U.K. and the EU, as well as successful turnaround of underperforming branches and sustainable margin improvement.
In 2024, SIG underperformed S&P’s EBITDA expectations due to tough market conditions in its key markets, including France, Germany, and the U.K. These countries represented about 83% of its 2024 revenue. The company delivered adjusted EBITDA of £92.5 million, lower than the anticipated £107 million-£109 million, and its debt to EBITDA increased to 6.9x, higher than the expected 5.9x-6.0x.
Despite the subdued demand likely to affect SIG’s top line, cost savings and the turnaround of underperforming business units are expected to lift margins in 2025. S&P predicts neutral revenue growth for the year, reflecting modest recovery in underlying demand and a challenging pricing environment. However, thanks to cost savings from the prior two years, SIG’s adjusted EBITDA is expected to increase to £112 million-£115 million in 2025, reducing adjusted leverage to about 5.8x-6.0x.
The European building materials sector is currently experiencing a downturn in residential construction, particularly of new buildings. However, S&P anticipates a very gradual rebound starting in the second half of 2025. SIG’s core markets, including U.K., France, Germany, and Poland, remain difficult, although there are early signs of recovery, particularly in the UK’s repair, maintenance, and improvement (RMI) market.
S&P could lower SIG’s rating if the company’s FOCF after lease payments weakens further, adjusted debt to EBITDA deteriorates to over 6.5x without swift recovery prospects, liquidity weakens or the covenant headroom erodes, or SIG departs from its prudent financial policy. Conversely, the outlook on SIG could be revised to stable if FOCF after lease payments turns sustainably positive and its adjusted debt to EBITDA remains below 6.5x.
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