The key take for me was that trading in the final quarter was marginally stronger than I had anticipated, buoyed by a combination of selling price rises (around 4.5 per cent) and volume growth of just shy of 8 per cent which in turn drove up second half revenues by 12 per cent. According to industry data from FENSA, volumes in the market declined by 6.6 per cent last year, so Safestyle is not only outperforming the market but is winning market share. In fact, the company’s market share increased from 8.48 per cent to 9.46 per cent in 2015, according to FENSA data. There are key reasons for Safestyle's continued outperformance of its rivals.
Firstly, as the largest independent PVC window company in the UK, the company has a major cost advantage over competitors that enables it to win business on price alone. In fact, it can sell some products at a hefty 20 per cent discount to other window companies' prices. Secondly, smaller rivals have been unable to match Safestyle's subsidised credit offer which has been pulling in customers. Thirdly, Safestyle’s board has shrewdly focused their sales and marketing effort on the buoyant south of England property market. This has not only helped to boost installations, but also selling prices too. In turn, the company has been able to reinvest some of the additional margin earned on these incremental sales into marketing and sales as well as its subsidised credit offer.
The net result is that Safetsyle increased the total number of windows and doors installed by over 4 per cent to 279,000 last year which in turn drove up annual revenues by 9.5 per cent to £148m. Based on an industry leading gross margin of 36 per cent, this translates into cash profits of £18.5m and pre-tax profits of £17.7m to produce EPS of 17.7p. The business is a robust cash generator and net funds almost doubled in the 12 month period to £16.5m, a sum equivalent to 20.5p a share. And it’s this cash generation that enables the board to pursue a progressive dividend policy: analysts predict the payout will be raised by 10 per cent to 10.2p a share for the 2015 financial year, rising to 10.7p a share in 2016.
The current year dividend forecast is based on Safestyle’s EPS rising to 18.2p after factoring in revenue growth of around 6 per cent. I certainly wouldn’t bet against the company achieving that target and neither are analysts. Matthew McEachran at broking house N+1 Singer believes there “are considerable upside risks to forecast assumptions for the current year.” He has a point as the industry has moderated after last year's declines, I understand that Safestyle’s latest order book is running at least 10 per cent ahead year-on-year, and rivals are struggling to compete with the company’s keen prices and compelling credit offer.
Trading on 12.5 times earnings estimates for 2016 after stripping out net funds on the balance sheet, and with the risk to earnings to the upside, I see no reason to change my positive stance on the shares. A 4.2 per cent prospective dividend yield is supportive too. In fact, analysts believe there is potential for the company to make a substantial return of its surplus capital in addition to the generous dividend, news of which could be forthcoming alongside the full-year results on Thursday, 17 March 2016. In the circumstances, I would advise that you continue to run your healthy 83 per cent paper profits on this holding.
Please note that I have published two columns today and have analysed the investment cases of 10 companies so far this week. My 2016 Bargain shares portfolio, and updates on all 10 constituents of my 2015 portfolio, will be published on our website and on the IC app after the market closes on Thursday 4 February.
MORE FROM SIMON THOMPSON...
I have written articles on the following 41 companies so far this year:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 January 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 January 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 January 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 January 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 January 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 January 2015)
■ Miton Group: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 January 2015)
■ Equity market strategy ('Bear Market signals', 25 January 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 February 2015)
■ Character Group: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small cap plays', 2 February 2016)
■ Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 February 2016)
■ Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 February 2016)
■ Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 February 2016)
■ 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
