The company’s strong cash generation – cash more than doubled to £10.8m in the first half of this year – was one of the key attractions when I initiated coverage on Safestyle when the price was 138p ('Window of opportunity', 23 December 2013). I last updated the investment case when the price was 180p (‘A clear cut buy’, 17 July 2014).
I was also attracted by the company’s decision to expand into the affluent south of England markets. There was positive news on this front as sales in region grew 21 per cent in the first half, double the rate of growth across the business, highlighting the early success of this strategic move. It certainly makes sense to do so as these geographic areas have benefited most from the housing boom and the UK economic recovery.
The other key take for me in the trading update was news of improvements in gross margins, volumes of frames installed (up 8 per cent) and average unit prices. This not only highlights buyer confidence in the housing market overall, but also reflects solid employment prospects in the UK given replacement windows is a discretionary spend.
Moreover, as the largest retailer and manufacturer of uPVC windows and doors for the UK homeowner replacement market, Safestyle is benefiting from market share gains too. In fact, its share of the market has increased from 7.85 per cent to 8.24 per cent since the start of this year, according to data from FENSA. This trend is only likely to continue because as the lowest cost national retailer and maker of uPVC windows and doors, Safestyle has a cost advantage over smaller firms and is able to target market its audience in a more focused and cost-efficient way given its greater scale.
Strong industry drivers
It’s also worth flagging up that with the ripple effect from the London housing boom now being seen in the provinces, then this is supportive of growth in the replacement window and doors market. That's because the number of uPVC windows installed in the last 20 years (so are coming to the end of their life) is set to grow significantly over the next few years. Customers are far more likely to do so when they have greater confidence in the value of their homes, something a rising housing market underpins.
That is not only good for the market as a whole, but for Safestyle in particular given its cost advantage over smaller rivals in pricing its products. Last year, the company installed 250,000 frames and increased installations by 8 per cent in the first half alone.
In my opinion, these industry drivers add weight to analysts’ estimates that Safestyle’s full-year pre-tax profits will rise from £15m to £17m based on an 8 per cent rise in revenues to £135m. If achieved this would lift EPS from 13.6p to 15.7p, and means that the 9.3p a share prospective dividend is covered 1.7 times. It also means that the shares are trading on a modest 11 times earnings estimates.
I also feel that there is a realistic chance of an earnings beat on next year’s earnings forecasts. Subject to review post last week’s results, analysts at Edison Investment Research predict that the company will report revenues of £139m in 2015, pre-tax profits of £18.7m, EPS of 17.4p and a dividend of 9.7p. However, given the 12 per cent growth in digital leads in the latest half year (these are far more profitable), increased geographic penetration, and improved margins, then next year’s revenue growth (and profit) estimates look too low in my view. Furthermore, with net cash forecast to swoon to £18.7m by the end of 2015, or the equivalent of 10p a share, then there could be another positive surprise on the dividend front too.
In the circumstances, I have no hesitation reiterating my buy recommendation with Safestyle shares trading on a bid-offer spread of 173p to 174p and maintain my fair value target price of 230p.
■ 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'
