Safestyle UK plc Taking share in a challenging market

Safestyle UK plc

Safestyle UK plc (LON:SFE) trading statement today confirms the difficult market conditions commented on at the Group’s AGM statement in May, with FENSA data showing market volume decline of more than 10% in the first five months of the year. Despite this backdrop, Safestyle has continued to grow its order intake, up 2% YOY, an encouraging performance that implies significant market share growth. We trim our forecasts for the first time since the Group came to market in December 2013 with modest revisions that reflect Safestyle’s continued outperformance. Our FY17 revenue and PBT forecasts move -4.9% and -6.4% respectively to reflect the weak market backdrop and management’s more cautious outlook for the second half. We maintain our dividend expectations, reflecting the Group’s strong cash flow generation and solid balance sheet with £16.2m net cash forecast in FY17. A dividend of 11.8p gives an attractive 4.6% prospective yield for a well-run business that is solidifying its market leadership thanks to its differentiated proposition.

A prudent outlook for H2 – Management have guided the modest revenue growth seen in the first half to continue in H2, with the impact of lower volumes, a result of elevated market uncertainty and weaker consumer confidence, mitigated by successful implementation of pricing initiatives. Safestyle remains the industry leader in the PVC window market, with a healthy price discount to its national peers, despite realising price increases in the year. Management has indicated that a softer than expected top line is now anticipated to result in flat profitability YOY. We conservatively assume a slightly larger impact in FY17 with PBT of £20.1m (FY16; £20.5m). Management has been proactive in reducing operating costs in response to the weaker trading environment.

Market leading position – The balance sheet remains robust, with £17.7m of net cash at the 30th June despite significant capital investment in new production facilities, which have been delivered on time and on budget, as well as the payment of a special dividend in July 2016. The new facilities improve production efficiency and leave the business well positioned to capitalise on a recovery in demand going forward. We forecast Safestyle’s market share is in excess of 11% as it continues to outperform the underlying market.

Forecasts – We revise our forecasts to reflect management’s more cautious outlook for H2. Our FY17 revenue forecasts falls -4.9% to £166.1m with PBT -6.4% to £20.1m. Our FY18 and FY19 forecasts move lower as a result of the lower base in FY17. We make no change to our dividend expectations, reflecting the strong cash generation and financial position of the Group.

Valuation: Adjusting for forecast net cash, Safestyle trades on 12.0x current year earnings, a valuation which we believe is undemanding given its market leading position and attractive value customer proposition. At current levels, the shares offer an attractive 4.6% dividend yield with scope for further special dividends going forward.

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