In a pre-close trading update yesterday the company confirmed that revenues have increased by almost 9 per cent to £68.3m in the first six months of 2013. With the benefit of margin growth, expect profits to ramp up when the company reports its interim results. Safestyle’s products continue to prove as popular as ever with its market share increasing from 7.85 per cent to 8.24 per cent since the start of this year, according to data from FENSA. This is a continuation of a strong trend as the company has boosted its share of the market for nine consecutive years and almost doubled it since 2007. As the lowest cost national retailer and maker of uPVC windows and doors, Safestyle has a cost advantage over smaller firms and the advantage of being able to target market its audience in a more focused and cost-efficient way given its greater scale.
The decision to expand into the affluent south and south east market is playing a part too as these geographic areas have benefited most from the housing boom and the robust UK economic recovery. A record order book, improvements in margins, volumes and prices all highlight the material change in buyer's confidence in the housing market overall, as well as more solid employment prospects in the UK. In turn, existing homeowners are feeling more comfortable when it comes to making discretionary spending decisions such as buying new windows. They have to be because the average spend per order on Safestyle’s replacement windows is over £2,800.
Furthermore, householders are far more likely to make major capital spending decisions of this nature if it can add value to their properties. In estate agents speak, this is the ‘move or improve’ scenario for homeowners. That's something a rising property market guarantees which is good news for Safestyle, the largest retailer and manufacturer of uPVC windows and doors for the UK homeowner replacement market. Last year, the company installed 250,000 frames.
It’s also worth pointing out that housing market transactions are a lead indicator for repair, maintenance and improvement (RMI) spending, so with industry experts expecting the regional housing market recovery to continue for some years to come, then this should feed through to further growth in the replacement window and doors market too.
Conservative earnings estimates
In the circumstances, it’s hardly a surprise that analysts are upbeat on Safestyle’s prospects. Ahead of this week's pre-close trading update, analyst Toby Thorington at Edison Investment Research was predicting a rise in current year pre-tax profits from £15m to £17.1m to produce EPS of 15.7p. However, these profit estimates are based on a £7.7m increase in full-year revenues to £132.5m.
In the first half alone, Safetsyle’s revenues rose by £5.6m, so these forecasts are looking too conservative. Edison had already upgraded their EPS estimates by 9 per cent following Safestyle's full-year results at the end of March and I would not be at all surprised to see another upgrade for this year and next post the interims in September. Currently, Mr Thorington expects the company to report revenues of £139m in 2015, to produce pre-tax profits of £18.7m and EPS of 17.4p.
On this basis, the shares are trading on a modest 11.5 times 2014 earnings estimates, falling to only 10.5 times 2015 forecasts. Moreover, with the benefit of a cash-rich balance sheet and robust cash generation, the dividend is forecast to rise to 8.7p in 2014 and 9.7p in 2015. This implies a forward dividend yield of 4.8 per cent, rising to 5.4 per cent in 2015. In my opinion, a prospective PE ratio of 11 is far too low for a business in an earnings' upgrade cycle and one where the share price is well supported by a bumper prospective dividend yield.
Target prices
Having initiated coverage on Safestyle when the price was 138p ('Window of opportunity', 23 December 2013), and last updated the investment case when the price was 195p (‘A clear cut buy’, 28 May 2014), I still feel my fair value target price of 230p is achievable. If the shares reach that level they would be trading on 13 times 2015 EPS estimates and that’s before factoring in the likely possibility of earnings upgrades later this year. Such a rating is not punchy at all once you factor in the robust cashflow performance of the company and burgeoning positive net funds position.
In fact, Edison forecasts operating cashflow of £18.3m this year, rising to £20.1m next, only a third of which is needed to cover the cost of the aforementioned progressive dividends. As a result the company’s net cash position is expected to more than double from £4.7m at the start of this year to almost £11m by the end of December. That’s the equivalent of 14p a share. Strip this sum out of Safestyle’s shares price and the cash adjusted forward earnings multiple drops to a modest 10.5for this year and a bargain basement 9.5 times EPS forecasts for 2015.
Offering 28 per cent potential share price upside to my target price, I rate Safestyle shares a strong high yielding income buy on a bid-offer spread of 178p to 180p.
■ Simon Thompson's new 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 £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
