Safestyle UK plc Another record performance in FY16 underpins Zeus Capital estimates

Safestyle UK plc

Safestyle UK plc (LON:SFE) pre-close trading statement in January had already stated that the FY16 revenue outcome was a record £163.1m (FY15: £148.9m) and indicated that profitability was in line with consensus expectations of £20.4m. The actual outcome of £20.5m is c. 2% ahead of ZC estimate of £20.2m. Organic FY16 revenue and profit growth of c. 10% and c.14% respectively is impressive in the context of an RMI market that was broadly flat during the year. This reflects Safestyle’s competitive advantage allowing it to take market share. We remain concerned with current headwinds across the wider building products sector, including input cost inflation, the UK consumer and the general economic outlook, but believe Safestyle is better placed to deal with these than most and will continue to drive organic growth in FY17. Cash adjusted, the shares trade on just 12.7x FY17 earnings with the potential for further special dividends in the coming years post completion of the recent capex program relating to the new production facility.

Good organic performance in FY16, but volume growth in H2 slower than H1: The number of frames increased 3.2% in the year, to c.288k, with average unit price increasing 6.4% due to mix and price increases. This more than offset the input cost increases the business experienced in the year. However, H216 was weaker in volume terms reflecting tougher comparatives, following the introduction of competitive consumer finance products in June 2015, and a weaker end to the year than had been expected. Weaker trading has been alluded to by others in the sector and as such we believe it to be a timing issue relating to December rather than Safestyle specific. Today’s outlook statement is encouraging indicating FY17 has started well and that the weaker trading has not persisted. Importantly, we understand the order book is once again at a high.

12 years of market share growth likely to become 13 in FY17: The company is the industry leader reporting over 10% market share for the first time in FY16. Its competitive position remains intact; being able to offer comparable product to the other nationals at a substantial discount without being dependent on financing commissions for its profitability. As a result, we expect Safestyle to continue to take market share in FY17 and remain better able than most to offset the industry headwinds currently being seen.

Valuation: Safestyle UK plc has outperformed its peers in FY16 with a 10% increase in the share price when many saw material decreases due to profit warnings. Despite this the rating of c.13.8x FY17 earnings does not look stretched, particularly when factoring in the strong competitive position and the potential for further cash returns. Cash adjusted the multiple falls to c. 13x.

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