Boasting a 7.85 per cent market share of the replacement window market, and having undertaken installed 250,000 frames last year, the company is the largest retailer and manufacturer of uPVC windows and doors for the UK homeowner replacement market. Moreover, having increased its market share for nine consecutive years, there is every reason to expect Mr Halbert will be reporting on a decade of market share gains at this stage next year.
As I pointed out in my analysis when I initiated coverage on Safestyle just before Christmas when the price was 138p ('Window of opportunity', 23 December 2013), part of the reason for this outperformance is down to the fact that the company is the lowest cost national retailer and maker of uPVC windows and doors, so has a cost advantage over smaller firms. Safestyle also has the advantage of being able to target market its audience in a more focused and cost-efficient way given its greater scale.
Sensibly, Safestyle has been expanding into the affluent south and south east market which have been major beneficiaries of the housing boom and the strong UK economic recovery. The strategy has clearly been working given the very positive trends seen across the business last year and the ongoing strong demand which led to a record order book. Indeed, margins remain robust, and volumes and prices have been on the rise, highlighting an improvement in confidence in both the housing market overall as well as employment prospects. With news of a housing market recovery hitting the headlines on a weekly basis, existing homeowners are undoubtedly feeling more comfortable when it comes to making discretionary spending decisions such as buying new windows.
That's important for Safestyle as housing market transactions are a lead indicator for the repair and maintenance and improvement market, and in particular the replacement window market. That's hardly surprising either given that the average spend on replacement windows is over £2,800 per order, so homeowners are more likely to make major capital spending decisions of this nature if it can add value to their properties. That's something a rising property market ensures.
In the circumstances, analysts are pretty upbeat, too. Subject to review post last week's trading update, analyst Toby Thorington at Edison expects current year EPS of 15.7p, rising to 17.4p in 2015. Edison had already upgraded the respective EPS estimates by 9 per cent and 17 per cent, post Safestyle's full-year results at the end of March. On this basis, the shares are trading on a modest 12.5 times 2014 earnings estimates, dropping to only 11 times 2015 forecasts. Furthermore, with the benefit of a cash-rich balance sheet and robust cash generation, the 5.5p a share final payout (ex-dividend of 18 June), is forecast to rise to 8.7p in 2014 and 9.7p in 2015. On this basis, the forward dividend yields are 4.5 per cent, rising to 5 per cent.
In my opinion, a prospective PE ratio of 11 for next year doesn't seem steep for a business in an earnings' upgrade cycle and one where the share price is well supported by a bumper prospective dividend yield. Interestingly, the technical set-up is positive, too. Having pulled back post results from a high of 217p in mid-April to successfully test the previous high from February this year, Safestyle's share price appears to have based out and looks to be making headway back towards that April high. The 14-day RSI is around 60, so offers scope for the rally to continue, while the moving average convergence divergence (MACD) indicator has just given a positive cross-over.
In the circumstances, my fair value target price of 230p, or the equivalent of 13 times 2015 EPS estimates, is supported from both a fundamental and technical perspective. Offering 18 per cent potential upside, and ahead of a pre-close trading update in July, I rate Safestyle shares a sound income buy on a bid-offer spread of 190p to 195p.
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