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Safestyle UK plc

Safestyle UK Plc Progress in turnaround leads to upgrade in FY19

Safestyle UK Plc (LON:SFE) We upgrade FY19 estimates on today’s trading update. Revenue increases 3.1% to £131m (prev. £127m) leading to an 18% increase in profit before tax to £5.3m (prev. £4.5m). The loss in FY18 increases to £8.5m due to timing as the improved run rate incurs additional costs prior to revenue and profit being recognised in FY19. Since the announcement (22nd October) of the five year non-compete with a party involved with Safeglaze, a business now in administration, Safestyle has seen a significant increase in staff resulting in a material improvement in sales order intake. Order intake over the last six weeks is comparable with the same period in FY17 indicating that the current run rate is ahead of expectations leading to today’s increase in FY19 forecasts. The current earnings multiple of 12.8x reflects the recovery underway at Safestyle and today’s statement indicates that whilst in the initial stages, the management team have made significant headway.

Returning staff is a good indication of the recovery of the business: Following the agreement of the non-compete, the Group has seen a material increase in headcount across its surveying, canvassing, sales and installations workforces. This is translating into a much-improved sales order intake. The increase in installer headcount is particularly pleasing, as this is vital to delivering on the improved order book and contrasts with constrained installation capacity experienced by some industry competitors of late.

Positive change to FY19 profitability forecasts: With order intake in recent weeks now running at levels comparable with 2017 sales, we move our FY19 revenue forecasts 3.1% higher to £131m. Operating leverage within the business means this results in an .18% increase in profitability to £5.3m. Increased investment in lead generation, commissions and overheads associated with an expanded workforce, combined with a timing difference between lead generation versus installation taking place means our FY18 forecasted loss after tax moves to £8.5m (prev. £6.5m) in line with the £8.2m to £8.6m guidance in today’s statement. Whilst the acceleration in workforce headcount impacts near term profitability, we believe this positive investment in the business should drive a stronger than previously forecast recovery.

Valuation: We believe the positive momentum seen in the business following the resolution of the dispute with SafeGlaze, along with ongoing self-help measures offers substantial turn around potential for the shares. The business’ production facility is well invested with good capacity for ongoing growth, and investment in technology is expected to generate efficiencies and incremental margin improvement going forward. Safestyle is currently trading on 12.8x FY19 earnings and carries low levels of debt. The Group will announce its final results for FY18 on 28th March 2019