That’s because on the back of market share gains, a growing order book and the ability to push through higher prices, confidence in the company meeting full-year earnings estimates has improved since I last advised running profits a few months ago when the price was 230p (‘Cash rich small caps’, 21 July 2015). It’s a company I know rather well, having initiated coverage on the shares at 138p ('Window of opportunity', 23 December 2013), and also updated the investment case at 220p earlier this year (‘Soaring small caps’, 24 June 2015).
The key take for me in the interim results was that Safestyle continues to gain market share from competitors – according to industry body FENSA its market share has increased 100 basis points to 9.5 per cent in the first six months of 2015 – in a weak market. This is largely down to the fact that smaller rivals are unable to match the company’s subsidised credit offer which has been pulling in customers who would have alternatively placed their business elsewhere, or not at all.
True, the subsidy on finance purchases means the gross margin earned on these orders is around seven percentage points lower, according to analyst Matthew McEachran at brokerage N+1 Singer, so don’t expect further margin gains as in the first half. But the additional profit earned on these incremental orders justifies the subsidy especially as the overall market has been softer than one would expect. The weakness seen across the industry may seem strange considering the positive macroeconomic and housing market backdrop that has been underpinning consumer confidence.
However, there is no getting away from the fact that Safestyle, the largest independent PVC window company in the UK, is managing to buck the trend. One reason for this relative strength is undoubtedly down to the board’s strategic decision to focus on the affluent market in southern England (sales in the region increased by 17 per cent last year), which has resulted in more installations and at higher margins. And it’s very profitable too.
On course to hit earnings forecasts
Following upgrades at the time of the pre-close trading update in the summer, Mr McEachran at N+1 Singer predicts fiscal 2015 pre-tax profits will rise from £16.8m in 2014 to £17.8m to deliver fully diluted EPS of 17.6p, up from 16.3p in 2014, and underpin a near 10 per cent rise in the payout to 10.2p a share. This is based on revenues increasing by 8 per cent to £147m in the 12-month trading period which seems sensible to me as first half revenues rose by almost 7 per cent to £74m and Safestyle is facing soft comparables in the fourth quarter of this year. On this basis, the shares are rated on 14.5 times earnings estimates and offer a prospective dividend yield of 4 per cent.
That valuation may seem fair, but it’s worth flagging up the robust cash generation of the business too. In the first half, the company converted over 90 per cent of its cash profits of £9.5m to net cashflow which in turn boosted net funds by £6.4m to £14.9m. That cash pile is worth over 19p a share alone, so on a cash-adjusted basis Safestyle’s shares are rated on nearer 13 times earnings estimates. The earnings multiple is set to fall further as analysts expect the company’s net funds to end this year at £17.5m, or 22.5p a share.
It’s also worth pointing out that momentum in Safestyle’s new conservatory offer is building and this is a key driver for the growth story next year when N+1 Singer predict the company will deliver pre-tax profits of £19.1m and EPS of 18.9p on revenue of £157m. Of course there is execution risk, but if these forecasts are achieved then the shares are only being rated on 11.8 times cash adjusted earnings for fiscal 2016 after factoring in a likely year-end net cash pile of £23m. Furthermore, I wouldn’t rule out an earnings accretive share buy-back programme, tender offer or even a special dividend to shareholders in the meantime.
Add to that the scope for further earnings upgrades given the easy comparables in the fourth quarter this year and my advice is to run your bumper profits with Safestyle’s shares trading on a bid-offer spread of 253p to 255p.
Massive dividend hike for Epwin
Shares in Epwin (EPWN: 138p), a manufacturer of extrusions, mouldings and fabricated low maintenance building products, hit an all-time high of 147p in mid-August, justifying my decision to recommend running profits at 134p in June (‘Soaring small caps’, 24 June 2015). The company listed on the Alternative Investment Market at 100p a share in the summer of 2014 and, having recommended buying the shares at the time ('Moulded for gains', 29 July 2014), I have remained positive ever since.
The share price move looks warranted as half year results were ahead of expectations outlined at the time the company listed so the board has delivered even though the overall market it’s operating in has been flat. Epwin generates 70 per cent of its revenues from the repair, maintenance and improvement market (RMI) by supplying exterior PVC building products (windows, doors, roofline and rainwater goods) into several UK market segments, so is a cyclical play on the domestic economy. But with its markets yet to pick up, taking costs out of the business – administration costs fell by £1.6m to £16.2m in the first half – and earning a better gross margin on sales were the two main reasons for the 31 per cent rise in the company’s first half operating profit to £8m.
When the improving economic environment eventually feeds through to sustained RMI market growth, then the company is ideally placed to benefit especially as there is significant pent up RMI demand from a generally old and under-invested housing stock that remains unaddressed. The forecast upturn in new build activity will also benefit the company. Moreover, with operating cashflow strong and net debt only £2.2m, down from £9m at the time of IPO and well within a £25m revolving credit facility that runs until July 2019 and a £5m overdraft facility, Epwin is now able to consider making earnings accretive bolt-on acquisitions that fit into its existing product portfolio.
The fact that the board increased the dividend per share by half to 2.12p is telling and analysts predict a total payout of 6.4p a share for the current financial year, almost twice covered by underlying EPS of 11.4p. On this basis, the prospective yield is 4.6 per cent. True, profit growth this year will not set your pulse racing – Edison Investment Research only predicts a modest increase in operating profit to £19.7m based on a small uptick in revenues to £268m. But it’s solid enough to justify a rating of 12 times earnings and I would recommend running your bumper profits with Epwin’s shares trading on a bid-offer spread of 136p to 138p. Run profits.
Solid income from jewel in the Irish sea
High-yielding shares in Isle of Man telecom company Manx Telecom (MANX: 188p) got within pennies of my 210p fair value target price at the end of May and have succumbed to profit taking since the summer. I last recommended buying the shares at 198p (‘Renewing old acquaintances’, 20 May 2015) after they made a move through the January all-time high of 190p into blue-sky territory.
If you followed that advice, or for that matter have held the shares since I first recommended buying at 164p ('High yield telecoms play', 15 May 2014), you will now have banked the final dividend of 6.6p a share for the 2014 fiscal year which was paid out in late June. You are also in line for a raised interim payout of 3.5p a share to be paid in early November, representing a six per cent hike on the 3.3p a share interim payout banked last year. Analysts also expect a final dividend of 6.9p a share to be declared at the time of the full-year results, implying an attractive prospective dividend yield of 5.5 per cent.
True, don’t expect much in the way of profit growth this year as fiscal 2015 cash profits are likely to only edge up slightly to £27.5m based on a flat revenue performance of £80m. But they easily cover the £11.7m cost of the 10.4p a share forecast full-year payout, while enabling the company to invest in its business including a superfast '4G' wireless network, expanding its data centres and rolling out faster broadband. Expect full-year EPS to rise from 12.2p to a range between 12.9p (Liberum Capital) and 13.4p (Edison Investment Research), so the payout is also covered by IFRS net earnings too. And with gearing only 65 per cent of shareholder funds, and net debt of £56m about two times cash profits, the board has the financial flexibility to continue doing so.
It’s a pretty defensive investment in my view given that the company has a virtual monopoly on the Isle of Man and enjoys a high degree of customer loyalty. Manx Telecom is also attractively priced as the company’s enterprise value of £267m equates to a multiple of less than 10 times annual cash profits. Add to that a thumping dividend yield, and I continue to rate the shares an income buy on a bid-offer spread of 186p to 188p.
Please note that my next column will be published online at 12pm on Monday, 5 October.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies since the start of last week:
■ Trakm8: Run profits at 195p, target 220p; Character Group: Run profits at 518p, target 575p; Marwyn Value Investors: Buy at 220p; Global Energy Development: Speculative buy at 30p; Software Radio Technology: Buy at 27p, target range 40p to 43p; Globo: Buy at 33p, target 69p; Pittards: Hold at 105p ('Cashed up for cash returns, 22 Sep 2015).
■ KBC Advanced Technologies: Buy at 112p, initial target 142p; K3 Business Technology: Run profits at 298p; Cenkos Securities: Buy at 177p; Netplay TV: Buy at 10p ('Small cap value plays', 23 Sep 2015).
■ Miton: Buy at 26.5p, target 35p; 32Red: Buy at 73.75p, target 90p; Stanley Gibbons: Buy at 138p; Vislink: Buy at 40p, target 70p ('Building momentum', 29 Sep 2015)
■ Moss Bros: Buy at 97p, target 120p; GLI Finance: Buy at 52p, target 80p; Town Centre Securities: Buy at 315p, target 350p; Globo: Buy at 39p, target 69p (‘Platforms for success’, 30 September 2015)
■ Safestyle: Run profits at 255p; Epwin: Run profits at 138p; Manx Telecom: Buy at 188p, target 210p (‘Income plays with capital upside’, 1 October 2015)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
