Safestyle UK – a short-term 25% plus gain in sight

In about a month’s time we should be getting the latest trading update from Safestyle UK (LON:SFE) – it should be very positive.

The AIM-quoted company is the largest retailer and PVCu manufacturer in the UK homeowner window and door replacement market.

Obviously, the group, like so many others across the country, has in the last year or so had some hassles – like supply and staff shortages – but its order book has continued to show a strong performance in its second half year.

The business and its orgins

Set up in 1992 in Bradford, West Yorkshire, the company called HPAS Ltd, traded under the name of Safestyle. But then it was focussed upon providing mortgages for ‘right-to-buy’ council tenants.

From supplying contact leads of its clients to various companies, it started to see the potential in using leads that it was previously giving to home improvement suppliers, for its own advantage.

It progressed from giving leads to window and door companies to actually getting into the supply business itself.

Eventually it realised that there were better margins in making and selling on its own production.

From supplying leads to actual manufacture

Today the company is engaged in the sale, manufacture and installation of replacement un-plasticised poly vinyl chloride (PVCu) windows and doors for the UK homeowner market.

The company’s segment includes the sale, design, manufacture, installation and maintenance of domestic, double-glazed, replacement windows and doors.

It has some 36 sales branches and 14 distribution depots located throughout the UK.

Recent Interims

In late September the group announced its half-time results for the six months to 4 July.

They showed revenues of £73.0m (£42.1m) and a pre-tax profit of £4.3m against a loss of £5.6m previously, with earnings improving from a 5p loss to a positive 2.6p per share.

Impressively the figures also revealed that the group’s net cash by the half-year end was more than doubled at £14.4m (£6.0m).

Trading in July and August continued to be as expected notwithstanding the operational challenges that the group continued to experience.

Even so the full year’s results are expected to be in line with market estimates.

Broker’s Views

Charlie Campbell, analyst at Liberum Capital, rates the shares as a ‘buy’.

For the year to the end of next month he estimates sales picking up from £113m to £144m, helping to turn the group around from its previous £5.2m loss to a £6.5m pre-tax profit, worth 4.5p in earnings and covering a 0.5p dividend per share.

The 2022 year he sees £154m of revenues and £8.0m of profits, generating 4.6p earnings and giving a 1.5p dividend per share.

Into 2023 the recovery continues to £164m sales, £10m profits, 5.5p earnings and a 2.1p dividend.

His price objective is a very handsome 80p.

Andy Hanson and Rachel Birkett at Zeus Capital see £144m sales, this year then £149.7m next year, leading to £155.7m in 2023.

For those years they estimate £6.9m profits, £8.3m for 2022, then £10.4m in 2023, with earnings of 4.2p, 5.0p then 6.2p per share respectively.

The analysts foresee net cash rising from £11.9m at the end of this year, to £17.3m next year and £24.2m in 2023.

Good spread of institutional holders

There are 138.61m shares in issue.

The leading shareholders include Alantra EQMC Assets (21.22%), Soros Fund Management (20.71%), Henderson Global Investors (11.94%), Jupiter Asset Management (8.35%), Standard Life Investments (4.78%), Invesco Advisers (3.22%), Hargreaves Lansdown Stockbrokers (3.17%), Baillie Gifford (2.98%), River & Mercantile Asset Management (2.58%), and Pictet & Cie (Europe) (2.24%).

My View

Ahead of next month’s trading update, I would rate the shares of Safestyle as a very attractive recovery play.

Capitalised at just £75m, with its shares at only 54p, and considering its excellent cash generation, together with its market dominance, makes it a prime bid candidate.

In the next few months, I can easily see the shares rising back up above the 68p level at which they peaked in May this year.

(Profile 06.01.21 @ 36.5p set a Target Price of 48p*)