It’s not difficult to see why investors’ attention has been sparked. Underlying EPS rose 8 per cent to 18.4p last year, but there is clearly strong momentum in the business as second half earnings rose by 11 per cent and I understand from analyst Matthew McEachran at brokerage N+1 Singer that the order book is up over 10 per cent since the turn of the year.
The outperformance of rivals – market share rose by almost 100 basis points to 9.46 per cent in 2015 – reflects a major cost advantage that enables the company to win business on price alone. In fact, Safestyle can sell some products at a 20 per cent discount to other window companies' prices. Smaller rivals have also been unable to match Safestyle's subsidised credit offer which has been pulling in customers.
Safestyle’s board has made a sound strategic decision to focus sales and marketing efforts on the affluent and buoyant south of England property market which has driven up installations, and has underpinned the ability of the company to push through price rises. Indeed, the company installed almost 280,000 frames last year, representing a year-on-year rise of 4.4 per cent, and average unit prices were up over 5 per cent to £531 per window frame. Also, the additional margin earned on these incremental sales, some of which would not have been booked without the credit offer, has been reinvested back into marketing and sales as well as enhancing the subsidised credit offer. The company is also investing in sales and marketing channels more effectively as highlighted by a 13.5 per cent increase last year in leads generated from media and internet marketing.
Special dividends
The net result is that Safestyle’s underlying pre-tax profits rose by 7 per cent to £18m in 2015 despite a weak industry back drop. Moreover, buoyed by a cash conversion rate of 95 per cent (the ratio of net cash inflow from operating activities to cash profits), Safestyle’s net funds almost doubled from £8.5m to £16.5m which has enabled the board to hike the full-year payout per share by 9.6 per cent to 10.2p. They have also decided to match the final dividend of 6.8p per share with a special payout of the same order, payable to shareholders on the register on 17 June 2016. The ordinary payout is covered 1.78 times by post tax earnings, so offering scope for the progressive policy to continue in line with earnings growth especially as the cash cost of the final and special dividend is £10.6m, a sum equating to 70 per cent of forecast post-tax earnings for the current financial year.
Or put it another way, with analysts at N+1 Singer upgrading their current year pre-tax profit and EPS estimates by around 3 per cent to £19.5m and 19.5p, respectively, this means that even after paying out 13.6p a share of dividends this summer, and factoring in a 10 per cent rise in September’s interim payout to around 3.7p a share, Safestyle could end this year with net funds of almost £13m, or 16.5p a share. And this is why analysts predict the payout will be raised by 10 per cent again to 11.2p this year.
Potential for upgrades
Moreover, there is scope for the company to outperform these raised estimates. Mr McEachran sees “scope for more upgrades in both the first and second half.” Analyst Andy Hanson at house broker and nomad Zeus Capital believes that the gross margin attrition resulting from the new finance product will be covered, or at least partly, during this year, something that’s not currently embedded in his estimates. He has a point because with the benefit of price rises at the start of the year there is potential for last year’s second half gross margin of 36 per cent to make headway back towards the first half margin of 37.2 per cent (before the launch of the finance product). If the 37 per cent margin is achieved this could lead to operating profit upgrades of the order of 5 to 10 per cent, according to Mr Hanson.
I would also flag up that Safestyle is up against some relatively easy comparatives in the first four months of this year. That’s because order intake only edged up 2.7 per cent in the same period in 2015 before the finance product was launched. It’s therefore reasonable to expect the company to continue to report strong sales growth at the annual meeting on 16 May and at the time of the interim pre-close trading statement in July. In fact, if recent sales trends continue I would not bet against an earnings upgrade in mid-May. And because some investors will want to hold the shares ahead of the ex-dividend date in mid-June, then the price could easily be pushed higher in the event of an upgrade.
Trading on a cash-adjusted PE ratio of 13 for the current financial year, and offering a prospective dividend yield of 4 per cent, my advice is clear cut: run your healthy profits.
Please note that I have published four columns today, 10 so far this week, and 19 since Monday last week, all of which are listed below. I am still working my way through a number of results announcements and will endeavour to update my views as soon as possible.
MORE FROM SIMON THOMPSON...
I have written articles on the following companies recently:
■ Plethora Solutions: Take profits at HK$0.079 ('On the takeover trail', 14 March 2016)
■ Somero Enterprises: Buy at 150p; target 185p ('A solid buy', 15 March 2016)
■ 32Red: Run profits at 150p ('32Red in the money, 15 March 2016)
■ Communisis: Sell at 44p ('Patience running short at Communisis', 15 March 2016)
■ Global Energy Development: Sell at 27p ('Global Energy plays waiting game', 15 March 2016)
■ Raven Russia: Sell at 30p ('Raven Russia battens down the hatches', 15 March 2016)
■ Stadium: Buy at 122p, new target price 150p ('Switch on for bumper gains', 16 March 2016)
■ French Connection: Buy at 42.75p ('Return to profitability looms for chic operator', 16 March 2016)
■ Fairpoint: Run profits at 159p ('Fairpoints to make', 17 March 2016)
■ Netplay TV: Buy at 10p ('Netplay's shares spin higher', 21 March 2016)
■ Satellite Solutions Worldwide: Buy at 5.5p, target 9p to 10p ('Blue sky tech play', 21 March 2016)
■ Miton: Buy at 30.5p, new target 38p (‘Riding earnings upgrades’, 22 March 2016)
■ Inland: Run profits at 86p, new target 95p (‘Valuation surge boosts Inland’, 22 March 2016)
■ Pittards: Crystallise loss at 71p (‘Subdued demand hits Pittards’, 22 March 2016)
■ French Connection: Buy at 43p ('Stakebuilding gathers pace at French Connection', 22 March 2016)
■ Safestyle: Run profits at 276p (‘Exploiting a window of opportunity’, 23 March 2016)
■ PV Crystalox: Speculative buy at 10p (‘Lights start to glow at PV Crystalox’, 23 March 2016)
■ Arbuthnot Banking Group: Buy at 1340p (‘Banking on a banking duo’,23 March 2016)
■ Cenkos Securities: Sell at 130p ('Cenkos profits slide', 23 March 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
