After three profit warnings, is Safestyle over the worst?

While many companies have been riding high in 2017, it’s been a year to forget for others. A plethora of profit warnings from consumer-facing companies has hit many, none more so than Safestyle (SFE).

The windows and doors specialist was going great guns mid-May, shooting to an all-time high 325p. Three profit warnings followed and it was only narrowly above its December 2013 IPO price at 150p earlier this month as investors cut their losses.

Interim results to 30 July gave us a taste of just how much “the severest contraction” in the double-glazing market since 2008/09 – according to chief exec Steve Birmingham – has dented profits.

Revenues grew modestly to £82.5 million, but underlying pre-tax profit was 15% down at £9 million. Gross margin fell by 130 basis points to 33.3%, earnings per share (EPS) declined 12% to 8.3p and the interim dividend was flat at 3.75p.

Clearly things aren’t good. But there are positives. Safestyle has a solid balance sheet, with a forecasted £13 million of net cash at year end. It flexed its muscles Thursday by announcing a £2.5 million share buyback programme – “a sign of confidence”, Liberum’s Charlie Campbell tells us.

And it’s one of the reasons shares are on the rebound, up 12.6% today and 40% since we last asked whether a bounce was possible.

Shareholder return is a key pillar of this still-intact investment case. A 6%-plus yield is supportive and, while the payout is expected to be held for this year and possibly next, a return to dividend growth won’t be far off.

While price list increases have more than offset increased raw material costs, an increase in online marketing costs also hit profits. However, a 9.1% increase in online lead generation has helped Safestyle continue to gain market share.

Though the steep rate of decline in the market has continued into the third quarter, Birmingham says Safestyle has maintained its order intake so far in the second half. Liberum’s Campbell reckons this shows the market has stabilised.

Analysts keep their already-revised forecasts unchanged. “Recent cuts are adequate enough,” explains Matthew McEachran at N+1 Singer. He upgrades the stock from ‘sell’ to ‘hold’ today due to the price having met his 180p target price.

Campbell, meanwhile, has been a long-time cheerleader. He re-iterated his ‘buy’ rating and 215p target today. Alongside the attractive yield and share buyback, he sees scope for a further special dividend at the end of this year to add to last year’s £5.5 million bonus.

“Now that the factory expansion programme [in Wombwell, South Yorkshire] has been completed [on time and on budget], Safestyle should have limited obvious capex requirements… this should mean that it is in a good position to return surplus capital.”

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.