Why Shares In ISG PLC Plunged Over 20% Today

ISG PLC (LON: ISG) slumps on profit warning and I think investors should stay away.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in construction services company ISG (LSE: ISG) are sliding this morning, down 27% at the time of writing, after the group issued a dismal trading update.

Management announced today that three contracts entered into more than 18 months ago had continued to impact on its performance, and added it is in protracted negotiations over a large construction contract entered in 2012 and has decided to make a provision against the contract. 

As a result of these provisions, management now expects ISG’s full-year results to be c.£7m below previous expectations. What’s more, ISG also announced today that it is discontinuing its London Exclusive Residential activities and closing its Tonbridge office at a total cost of £17m. In other words, ISG issued a severe profit warning this morning. 

That being said, management did note that, excluding the construction contract difficulties, ISG’s its half-year performance came in ahead of its expectations.

Still, these loss provisions and restructuring costs, which total £24m, are set to throw the group into a loss this year.

In particular, the City was expecting ISG to report a full-year pre-tax profit of £14.9m for the year ended 30 June 2015. With write-offs and charges totalling £17m, ISG is set to report a loss of £2.1m for this year. 

Nevertheless, despite this profit warning ISG remains well capitalised and has a strong order book. Net cash as at 31 December 2014 was £38m, up 15% year on year, while the group’s order book is valued at £1bn.

Slim pickings 

ISG’s business is low margin by nature, which only serves to amplify the group’s troubles when they occur. For example, the group’s average pre-tax profit margin for the past five years has been in the region of 1%, not leaving much room for error at all. Even before the loss provisions announced today, ISG’s pre-tax margin for 2015 was expected to be in the region of 0.8%. 

Further, before today’s profit warning ISG was trading at a surprisingly high valuation of 15 times historic earnings. That’s a premium valuation more suited to a high-growth tech company, rather than a low-margin, cyclical construction business. 

And this valuation explains the market’s negative reaction to ISG’s profit warning. The group has quite clearly failed to live up to expectations. 

Moreover, it remains to be seen if ISG can return to growth. City analysts have not yet updated their forecasts for the company based on today’s news. Additionally, it remains to be seen if today’s loss provisions are the end of the story. Indeed, with industry leaders like Balfour Beatty struggling to turn a profit in the UK construction market, it seems as if the odds are stacked against ISG.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »