Safestyle UK: Further volume uplift should underpin the next leg of the recovery says Zeus Capital

Duraflex

First half performance indicates that the turnaround is almost complete with Safestyle UK plc (LON:SFE) reporting the best half year financial performance since H2 2017. Revenue of £73.0m is up 73.4% yoy but more importantly increased 13.3% on the H1 ’19 performance. The recovery in revenue picked up pace during the half, after four months it was 10.9%. Gross margin increased 639bps to 32.3% on HY19 as average selling price increased 11% despite a negative movement in mix. This resulted in adj. profit before tax of £5.1m. ZC FY21 PBT estimate, of £6.9m, was upgraded at the time of the pre-close trading update (22nd July) and despite the H1 performance accounting for c.70% of the FY estimate, forecasts are unchanged as per guidance in today’s results. There are headwinds in terms of supply shortages but with three months of FY21 remaining, confidence in, at least, achieving estimates is high. An earnings rating of c.13x is not stretched when looking at the speed of the recovery of earnings and the improvement in cash flow, potentially leading to increased shareholder distributions.     

  • Recovery in gross margin driven by price: Price per frame increased 11% to £764 in the first six months of the year and whilst volumes recovered 53.5% on H1 20 they remained 3% down against H1 19. Gross margin increased 639bps versus H1 19 to 32.2% meaning gross profit was 41.4% ahead at £23.5m. The improvement in margin was underpinned by lower lead generation costs and a reduction in finance subsidies. 
  • Further volume uplift should underpin the next leg of the recovery: Volumes remain below H1 19 and materially below historic levels achieved by Safestyle UK. Exhibit 2, page 3, shows six-month installation volumes since 2014. The performance in H2 20 and H1 2021 are both c.30% below the normalised levels pre-2018. Accounting for the increase in average price, volumes would only need to be c. 80% of historic levels to generate peak revenue.   
  • Outlook for H2 obscured by severe headwinds: The strong margin recovery is unlikely to be maintained in H2 as lead generation, raw material and labour costs increase. Safestyle has been proactive in managing price increases with a view to mitigating future inflationary pressures but it is unlikely that H2 will see a similar level of appreciation. Putting some of these headwinds in context, resin continues to trade at all-time highs and is c. 80% above the prevailing 2018 level.
  • Clarity on distribution policy: Safestyle UK cancelled its dividend back in 2018 and it also raised £8.0m net from investors to strengthen the balance sheet during the pandemic. Today’s statement indicates the Board will liaise with shareholders later in the year to garner views on distribution policy going forward. This could include special dividends or buy backs to complement the usual dividend.
  • Valuation: 12.9x current year earnings does not look expensive with the speed the recovery is coming through. Solid trading for the remainder of the year would lead to upgrades.
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