A cooling in the shares of Safestyle (SFE) has left the uPVC door open for investors to get into this cash-generative stock. The Jersey-based window and door specialist, which floated on the Alternative Investment Market (Aim) in 2013, has exploited its ability to fabricate quality products for about a fifth less than its competitors to grow its market share over the past 11 years from 4 per cent to 10 per cent, while commanding an industry-leading operating margin of 12.6 per cent. With the order book at record levels, a number of sales growth initiatives under way and fledgling signs of a long-awaited turn in the replacement maintenance and improvement (RMI) market, we think now looks a great time to buy.
- Potential special dividend
- Credit option popularity
- Gaining market share
- Conservatory business started well
- Raw material costs
- Lead generation costs
Since coming to market, Safestyle has been working to broaden its potential customer base. Sales have already started to benefit from the group's recently launched consumer finance product, which focuses on boosting orders by offering good deals rather than profiting from high interest charges - as is the case with some competitors. The company has also seen a robust start for its conservatory upgrades business.
Price increases earlier this year to cover the cost of the credit appear to have done little to dent demand, although fulfilling older orders at lower prices did contribute to a small drop in first-half gross margins from 34.1 per cent to 33.7 per cent. The ability to increase prices is also reassuring given expectation of raw material cost increases following the weakening of sterling.
The company stands to benefit from its investment in media and online sales generation. Such leads grew 26 per cent to 39,118 last year, compared with 12 per cent growth in the first half of 2015. This has the potential to drive down the group's high lead-generation costs by moving it away from door-to-door canvassing (see chart).
Safestyle's lead generation is changing
Strong cash generation led to the company paying out a 6.8p special dividend last year (not included in our table), which broker Zeus Capital expects will result in a reduction in year-end net cash to £13.1m. Some of the group's cash is earmarked for investment in a factory extension at Wombwell, South Yorkshire, with capital expenditure expected to pick up to £5.4m this year and next, compared with £1.6m last year. Nevertheless chief executive Steve Birmingham told Investors Chronicle in September that he would "not rule out" another special dividend if there was excess cash left over.
| SAFESTYLE (SFE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 246p | MARKET VALUE: | £204m | |
| TOUCH: | 243-246 | 12-MONTHHIGH: | 288p | LOW: 205p |
| FORWARD DIVIDEND YIELD: | 4.8% | FORWARD PE RATIO: | 12 | |
| NET ASSET VALUE: | 42p** | NET CASH: | £23.6m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p)* |
|---|---|---|---|---|
| 2013 | 125 | 15.0 | 14.8 | 5.5 |
| 2014 | 136 | 16.4 | 16.6 | 9.3 |
| 2015 | 149 | 17.6 | 17.8 | 10.2 |
| 2016* | 165 | 20.2 | 19.6 | 11.3 |
| 2017* | 175 | 21.2 | 20.4 | 11.8 |
| % change | +6 | +5 | +4 | +4 |
Normal market size: 3,000 Matched bargain trading Beta: -0.19 *Zeus Capital forecasts, adjusted PTP and EPS figures, excludes 2015 6.8p special dividend **Includes intangible assets of £21.2m, or 26p a share | ||||
