Shares in window and doors retailer Safestyle UK (SFE:AIM) slump 9% to 297p as the market punishes today’s profit warning. Yorkshire-based Safestyle flags a recent sales slowdown and warns first half profits will be lower year-on-year, although investors shouldn’t slam the door on a cash generative company with compelling investment credentials.

Safestyle makes and retails PVCu replacement windows and doors. Today's statement ahead of the company's annual general meeting (AGM) sees chairman Steve Halbert herald a positive start to 2017 with ‘robust order intake’ in the first quarter.

The bad news is recent trading has disappointed. This is reflected in latest data from FENSA, the replacement window and door industry Competent Person Scheme (CPS) watchdog, which indicates a 9% decline in national installations in the first three months of 2017.

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Order growth slows

Safestyle’s order growth slowed to 2% in the first four months of 2017, reflecting market weakness but also last year’s particularly tough comparative. Order intake rocketed 24% higher in the first four months of 2016.

As Liberum Capital points out: ‘Management does not believe that the competitive situation has changed, but it is possible that in a tougher market, competitors,’ including Anglian and Everest, ‘have fought harder for leads than in the recent past.’

Safestyle still expects to grow the half year revenue line, but profits will be down year-on-year due to lower volumes and ‘some parallel running costs following investment in our new production facilities’ at Wombwell, South Yorkshire.

In the frame for growth

Guided by CEO Steve Birmingham, Safestyle has a track record of relentless market share gains and remains confident of achieving full results ‘broadly in line with market expectations’, code for hitting the lower end of the consensus range.

An improved second half turn is expected with the aid of price rises, tightening up on discounts and factory productivity gains. Double running costs will disappear in the second half as the factory expansion is complete and starts to deliver operational efficiencies. Yet given a more testing backdrop, the risk of earnings disappointments cannot be ruled out.

While this morning’s news is disappointing, Safestyle has a strong balance sheet and a copiously cash generative model that is enabling it to invest in competitive advantage whilst paying a progressive ordinary dividend and special dividends too.

What the analysts are saying

Despite trimming its 2017 sales estimate from £174.6m to £171.9m, Liberum leaves its pre-tax profit forecast unchanged at £21.6m and sticks with its ‘buy’ rating and 335p price target.

‘In spite of a slow start to 2017, Safestyle's management is confident of hitting market expectations as self-help initiatives boost gross margin and control overheads,’ says the brokerage.

‘The outlook for the second half is better as comps get easier and the factory expansion delivers efficiencies. We leave pre-tax profit and EPS (earnings per share) estimates unchanged, in spite of trimming sales expectations. Safestyle's market share has grown from 5% to 10% in the last seven years and we expect more gains in future, generating good EPS and dividend growth, even if markets remain unhelpful.’

Safestyle UK - MAY 2017Zeus Capital number cruncher Andy Hanson is also keeping his forecasts intact for now. ‘Earnings risk increases as a result but Safestyle has a track record of meeting market expectations and has levers in terms of pricing, conversion, financing and productivity to drive profitability,’ writes the analyst. ‘Irrespective of the wider market, it is expected that Safestyle will continue to take market share from the other national operators.’

Over at N+1 Singer however, Matthew McEachran takes a different view, downgrading his 2017 sales growth assumption by another 2.5%, having pruned his top line estimate by 1.5% in March.

‘While this doesn’t spell disaster, given a number of efficiency and productivity initiatives, we have taken 5% off EPS forecasts and another 2% off our target price to 280p ,’ says McEachran. ‘Given the stock has rallied to 320p since moving to hold in January to reflect the negative risk/reward balance, we now downgrade our recommendation to sell.'


Issue Date: 18 May 2017