Safestyle UK operating environment remains sound and could outperform its peers (LON:SFE)

Duraflex

Safestyle UK plc (LON:SFE) is the topic of conversation when Zeus Capital’s Research Director Andy Hanson caught up with DirectorsTalk for an exclusive interview.

Q1: We’ve just seen a full year trading update from Safestyle UK. How has trading been during the year, Andy?

A1: The year has been really, really good for the company actually in terms of demand. Obviously, as we came out of lockdowns and people couldn’t go away on foreign holidays, they started spending more money on their house and so the company saw really, really good demand throughout the year.

They had an exceptionally strong first half to the year where they were up about 13% against FY19 comparatives, way ahead of FY20 which were pandemic-affected. Trading actually got a little bit stronger during the second half and was 13.6% ahead of FY19 by the year end.

They also say that, at the end of the year, the order book was the second strongest it’s ever been, up against last year, and in the first half we know they put double-digit price increase through, and it does appear that they’ve got some price traction in the second half of the year as well.

So all in all, they’ve had a really strong year.

Q2: So, does that mean that it’s impacted on your forecast in some way?

A2: I was quite confident going into the full year just because the strength of the first half, but yes, they they’ve come out and for me, revenue was in line.

I think the important thing here, the cost input pressures the business has had, they’ve seen a really strong turnaround in the bottom line, which means operationally, they’ve managed to offset the cost input pressures with the price increases and then below that gross margin line, they managed to really sweat the assets. So, I increased my profit numbers by almost double-digit this morning for FY21 and I rolled that through into FY22 and FY23 and tweaked my numbers up there as well.

You can really say that the recovery in the operational business has finished and we can get back to where it was 4-5 five years ago.

Q3: How do you see the outlook for the year, there appear to be some reasons to be concerned?

A3: It’s a good question and it’s a difficult one to answer at the moment.

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Obviously, we’ve got residual impact from the pandemic that’s going to roll through FY22, supply chains are still an issue, commodity cost are through the roof etc. which will prove headwinds. I’m hoping by the second half of the year, we will see some of those headwinds concede, particularly in terms of commodity costs, which will help businesses like SFE.

Consumer spending is very likely to return to normal patterns, people are going to want to go on foreign holidays etc. but I think the company’s saving grace is it’s still coming off that base of 3-4 years ago where it had unfair competition and it can still take market share against it competitors.

Interestingly, strong performance in FY21 was driven without the aid of any real marketing campaign and they do say in today’s statement that they’re going to start TV advertisement again.

So, I think even if things slow for the sector, they should be able to see its way through that and I think it’s always been able to put price increases through it and you combine that with the volume coming through and price increases, I’m still very, very positive for the company.

I do concede there are, for many businesses in the sector, definite headwinds.

Q4: So, with the turnaround process finish now, what does the Safestyle UK valuation look like?

A4: Looking forward to my FY22 forecast, which I obviously upgraded this morning, the shares are trading on less than 10 times earnings and I think if we do see that demand environment remain where it is currently, that 9.6 times could be 8.6 or even 8 times, which looks exceptionally cheap.

The balance sheet’s strong, it had £12 million of net cash at the end of the year and at the moment, I’ve only factored in a payout ratio of 25%. I would imagine that when we get the full year results in March, they will give us more information to what they plan to do with the payout ratio and that payout ratio could increase quite dramatically which will obviously be beneficial for investors.

So all in all, I think operating environment remains sound, the structural drivers for the company which should see outperform peers in the sector and the valuation stacks out.

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