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OPINION

Clear cut gains

Clear cut gains
January 6, 2016
Clear cut gains

It’s easy to see why investors are riding the momentum in the business while Safestyle, the largest independent PVC window company in the UK, continues to outperform its rivals even in a relatively weak market. This is partly down to a strategic decision to focus on the affluent market in southern England which has boosted both installations and margins earned. But the one percentage point rise in Safestyle’s market share to 9.5 per cent in the first six months of 2015 also reflects the fact that smaller rivals are unable to match the company’s subsidised credit offer which has been pulling in customers. The profit earned on these additional orders more than warrants the subsidy.

It’s also fair to say that when Safestyle releases a pre-close trading statement at the end of this month we can expect further market share gains – the company has posted gains each year for the past decade - and potentially news of a double digit increase in like-for-like sales in the second half of 2015. That’s because the business is up against very soft comparables from the second half of 2014. Indeed, having posted a near 7 per cent rise in first half revenues to £74m, analyst Matthew McEachran at broking house N+1 Singer predicts the company will grow its second half revenues by almost 10 per cent to £73.4m – it could be higher – buoyed by a strong order book, additional marketing spend (both television and digital) and the uptake from the credit offer.

On this basis, Mr McEachran forecasts 2015 pre-tax profits will rise from £16.8m 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 means the shares are now rated on 15.6 times earnings estimates and offer a prospective dividend yield of 3.7 per cent. That may now seem a fair rating, and is clearly far higher than the 9.5 times earnings multiple on offer when I started coverage two years ago, but there are other issues to consider, the main one being the ability of the business to throw off cash which can be reinvested or paid out to shareholders.

Indeed, I strongly suspect the board will flag up the strong cash generation of the business in the pre-close trading update on Monday, 25 January 2015 ahead of the full-year results on Thursday, 17 March. Having increased net funds by £6.4m to £14.9m in the first six months of 2015, analysts predict the company will have ended last year with a cash pile of £17.5m, a sum worth 22.5p a share. This means that on a cash-adjusted basis Safestyle’s shares are rated on 14 times last year’s likely earnings. Moreover, as long as the company can keep the top-line ticking over, and hold its margins, then that cash pile will only grow further. Current estimates are for Safestyle to end 2016 with net funds of £23.1m, or almost 30p a share, and that’s after factoring in a further hike in the dividend to 10.8p a share. And if the company can deliver the £10m increase in sales this year as N+1 Singer forecast, then its pre-tax profits and EPS will rise again to £19.1m and 18.9p, respectively. On this basis, the shares are rated on less than 13 times cash adjusted earnings estimates using that forecast year-end cash pile, a valuation that offers scope for further share price gains.

Furthermore, I wouldn’t discount the possibility of Safestyle posting an earnings beat in a few weeks time given the weak comparatives and conservative analysts’ estimates. I wouldn’t rule out either an earnings accretive share buy-back programme, tender offer or even a special dividend to shareholders as the company could easily pay out half its current pile. My advice is simple: run your bumper profits.

Please note that I have published four columns today, all of which are available on my home page.

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