Safestyle UK plc Another good year – Zeus Capital

Safestyle UK plc

Safestyle UK plc (LON:SFE), the leading UK-focused retailer and manufacturer of PVCu windows and doors for the homeowner market, has today provided a trading update for the year ended 31 December 2016.

The Company has continued to trade well, with revenue for the year increasing 9.8% to approximately £163.5 million (2015: £148.9 million). In addition, profit before tax has shown good progress and is in line with Board expectations. As expected, our second half showed slower growth than H1 due to more challenging comparatives.

Our performance in 2016 has been pleasing and we estimate that we have continued to gain market share. Our growth is reflected in the increase in frames manufactured during the year, up 3.2% to 288,460 (2015: 279,453 frames), whilst the number of installations increased 4.7% to 62,989 (2015: 60,134).

Price increases implemented at the start of 2016 helped us deliver improved operating margins, offsetting consumer finance subsidy costs, which have become an established feature of our cost base.

Cash flow has continued to be strong and we ended the year with cash of £13.5 million (31 December 2015: £16.5million), having paid a special dividend during the year of £5.6m and incurred £4.6m of expenditure on our new factory extension, which continues to be on time and on budget.

The Company intends to announce its audited results for the year ended 31 December 2016 on 23 March 2017.

Steve Birmingham, CEO of Safestyle UK, commented: “I am pleased to report that trading during 2016 was consistently strong and that we have achieved another year of record turnover. 2017 will see increases in our raw material costs primarily due to sterling weakness. However, we plan to offset such increases by improving the price we obtain for our products. Despite the uncertain macroeconomic outlook, we remain cautiously optimistic and believe we are well positioned to continue growing the business.”

Zeus said: Today’s trading update highlights that 2016 has been another good year for (LON:SFE) reporting record revenue, that will translate into record profitability, and continuing to take market share. Revenue of £163.5m (FY15: £148.9m) is broadly in line with the ZC estimate of £165.0. Profitability is in line with management expectations and will be in line with consensus and the ZC estimate of £20.2m. SFE has grown revenue and profit by c. 10.0% and c. 15.0%, respectively, during FY16. This level of growth looks to be at the upper end of the peer group’s performance in a year when the sector has had to deal with the continuing difficult RMI market and input price pressures, as raw material costs increase. The company’s best in class performance has been reflected in the share price which is trading near all-time highs at 311.75p. Despite this, the FY17 PER multiple of 15.3x does not look stretched when taking into account the competitive position of the business in its market and the potential for further cash returns.

H2 performance in line with expectations: The company introduced its lower consumer finance offerings in June 2015 driving significant volume growth with yoy increase in frames of 5.0% in H215 and 5.7% in H116. H216 forecasts had assumed a degree of slowdown in both volume and revenue growth against tougher comparatives. It would appear the c. 1% volume growth has driven a 6.7% increase in revenue, in line with expectations. In addition, assuming profitability is in line with ZC forecasts, as appears the case from today’s statement, management has managed to offset the gross margin impact of the finance offering. The performance in the second half leaves the business well placed to meet conservative profit growth estimates of c.5% in FY17.

Competitive strength of the business highlighted in FY16: With the wider industry facing the headwinds of cost pressure and a lack lustre RMI market, Safestyle has continued to outperform, taking market share. It has been able to do this by increasing pricing to offset cost pressures, it remains a low cost producer, and offering attractive consumer finance packages to drive volume. With the other major national players continuing to rely on high cost finance offerings the company has a significant competitive advantage. With the dynamics of the industry unlikely to change in the near term, the company remains well placed despite further cost pressures and the potential for a slowdown in UK consumer spending.

Valuation: Safestyle UK plc has outperformed its peers in terms of share price performance over the last twelve months and is currently trading near an all time high of 311.75p. Despite this the 15x PER multiple of FY17 earnings does not look stretched when factoring the strong competitive position and the potential for further cash returns.

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