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This profit warning could be a sign of trouble for housebuilders

Image: Galliford Try: Fair use

Shares of insulation group SIG (LSE: SHI) fell by 20% this morning, after the firm warned that profits would be significantly lower than expected this year and announced the immediate departure of CEO Stuart Mitchell.

Nearly six months after the UK voted for Brexit, the outlook for the housing market is still unclear. Housebuilders continue to publish strong results and confident guidance. But the companies that supply them are reporting weaker trading.

One explanation may be that housebuilding is performing better than commercial building. Another may be that any slowdown in housebuilding will be felt by suppliers first.

Let’s look for clues in today’s profit warning from SIG and consider the latest comments from a building firm with a forecast dividend yield of 7.6%.

CEO leaves as profits plummet

SIG said this morning that underlying pre-tax profit for this year will be “in the range of £75m to £80m.” Based on the firm’s performance over the last 18 months, I estimate that this is about 15%-20% lower than was originally expected.

The group said that like-for-like sales fell by 1.1% between July and October, although total sales — including acquisitions — rose by 10.6%. However, SIG warned that competition was putting pressure on margins, and said that a number of commercial building projects had been delayed. Demand for technical insulation from industrial customers was also “subdued.”

Interestingly, SIG didn’t make any comment about housebuilding. This suggests that performance is in line with expectations. What’s surprising to me is that Mr Mitchell has been given the boot so quickly. This makes me think that there could be more bad news to come.

One possible clue in today’s statement relates to SIG’s offsite construction business. This unit builds pre-fabricated modules for new buildings. Unfortunately, delays in the commissioning of new plant have forced the group to postpone delivery of some customer orders until next year.

The offsite construction business has been pitched by SIG to investors as a big growth opportunity. In August, we were told that it should generate at least £15m of operating profit by 2018. Given that the group’s operating profit was £98.7m last year, that’s a significant amount. However, I suspect this guidance is now in doubt.

Overall, my view after today’s news is that more problems are likely at SIG. I would steer clear until the picture becomes less muddy.

Is this 7.6% yield for real?

Housebuilder Galliford Try (LSE: GFRD) is unusual because it also operates a construction business. The group’s shares are down by 16% this year, but profit forecasts have remained broadly unchanged. As a result, the shares now look very cheap, with a forecast P/E of 8.3 and a prospective dividend yield of 7.6%. Are these figures simply too good to be true?

Not necessarily. Galliford started the year with an order book of £4.9bn. That’s equivalent to nearly two years’ sales. The group expects construction work, such as affordable rented housing and utility work to remain stable, despite a slowdown in commercial building. Demand for private housing is also said to remain “solid.”

Although there’s some risk here, I think it’s possible that Galliford Try will deliver on its guidance for this year. This stock could be worth a closer look at current levels.

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Roland Head 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.