Small Cap Value Report (8 Sep 2017) - SFE, GNK, REDS, FLTA, FDEV

Friday, Sep 08 2017 by

Happy Friday!

I thought I'd get going with another pre-open publication here.



Safestyle UK (LON:SFE)

  • Share price: 162.25p (-31%)
  • No. of shares: 83 million
  • Market cap: £135 million

Trading Update

Bad news for shareholders, I'm afraid. The announcement has the makings of a nasty profit warning for this double-glazing business which describes itself as "the largest company in the UK homeowner window and door replacement market".

There will be a material impact on profits for 2017, due to higher costs and yet revenues only expected flat against last year.

Since [July 2017], the Group's order intake has declined beyond the Board's expectations. The Board believes this is due to an accelerating weakness in the market resulting from increasing consumer caution, as evidenced by the latest FENSA statistics, which show that the overall market has deteriorated further, with installations down by 18% in June and July compared to 2016.

So Safestyle reckons that it has grown market share by maintaining its revenues around the same level as last year, but the expenses around driving those orders will result in a hit to profitability.

The profit warning back in July hit the share price by about 16%, so I wonder what's in store for it today. Edit: Down 31%!

It does at least have the benefit of not being leveraged, with a healthy cash position on the balance sheet. It had almost £18 million net cash at end-June.

Stockopedia metrics like it, with a Quality Rank of 98 indicating to me that it probably has a differentiated business model. Indeed, its market share has been growing, and it has been profitable, for over a decade.

But as Paul has astutely noted in recent times, the PE ratio for a stock like this needs to compensate for the cyclicality of the sector. These stocks can look the cheapest right when they are most overpriced, and can look the most expensive when they are the best value, because of this factor.

I also think the dividend might be at risk, since at 11.25p for 2016 it was already covered less than twice by EPS. With earnings about to take a hit, I wonder if the company might choose to conserve more cash for a potential recession rather than pay out a >5% yield to investors.

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All my own views. I am not regulated by the FSA. No advice.

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Safestyle UK plc is a United Kingdom-based company engaged in the sale, manufacture and installation of replacement un-plasticized poly vinyl chloride (PVCu) windows and doors for the United Kingdom homeowner market. The Company's segment includes the sale, design, manufacture, installation and maintenance of domestic, double-glazed, replacement windows and doors. The Company has over 30 sales branches and approximately 10 distribution depots located throughout the United Kingdom. Its product range includes EcoDiamond WINDOWS, EcoDiamond UPVC DOORS, EcoDiamond BI-FOLD DOORS, EcoDiamond REPLACEMENT CONSERVATORIES, GuardDoor, Pavilion and Inspire. It has manufactured over 279,000 frames and carried out approximately 60,000 installations. The Company's subsidiaries include Style Group Holdings Limited, Style Group Limited and HPAS Limited. more »

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Greene King plc is an integrated pub retailer and brewer. The Company operates approximately 3,040 managed, tenanted, leased and franchised pubs, restaurants and hotels, including brands, such as Hungry Horse, Chef & Brewer, Flaming Grill, Farmhouse Inns and its Greene King locals estate. The Company's segments include Pub Company, Pub Partners, and Brewing & Brands. The Pub Company segment is engaged in the operation of managed pubs and restaurants. The Pub Partners segment is involved in the operation of tenanted and leased pubs. The Brewing and Brands segment is engaged in brewing, marketing and selling beer. The Company's ale brand portfolio includes Old Speckled Hen, Greene King IPA, Abbot Ale and Belhaven Best. The Pub Company segment operates approximately 1,820 pubs and restaurants across Britain. The Company's breweries include Westgate Brewery, which is located in Bury St. Edmunds, and Belhaven Brewery, located in Dunbar. more »

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Smartspace Software PLC, formerly RedstoneConnect PLC, is engaged in providing technology and services for smart buildings and commercial spaces through its core businesses, Redstone and Connect IB. The Company, through Redstone, provides a range of services, including design, build and installation; and software solutions. The managed services encompasses the provision of outsourcing services spanning network infrastructure management, smart buildings support services, desktop and data center support services and move, add and change services. Redstone offers OneSpace occupancy management product. The Company, through Connect IB, creates digital solutions. Connect IB develops and deploys applications, including those that address mapping and way finding of Smart Buildings and Smart Spaces, such as car parks or retail shopping centers. It serves customers of all sizes, including corporations, such as property developers, landlords and principal occupiers of commercial property. more »

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  Is LON:SFE fundamentally strong or weak? Find out More »

39 Comments on this Article show/hide all

Zipmanpeter 8th Sep '17 20 of 39

In reply to post #216773

I response to daveinthelakes note on Provident Financial (LON:PFG) and Non-Standard Finance (LON:NSF), I recently took took out small position in Non-Standard Finance (LON:NSF) and am considering much more. (I work in Nigeria and also understand the genuine never-going-to-disappear market need for "sub-prime doorstep loans" for the poor and prefer this morally from regulated companies vs uncontrolled mafia style enforcers which will otherwise ensue).

NSF (and Morses Club) will benefit big time from PFG's problems for sure but this will only really show up in their results in another 6 months once all the good agents have transferred to NSF/Morses AND been able to bring their best clients over. Much more lending and better credit book and thus better profits but short term costs.

However, NSF have ALSO just pulled off a good deal to become no 2 in Guarantor lending (ie person A stands behind lender B who gets much lower interest and lowers risk to lender) . NSF already no 1 in branch based lending which they are expanding fast - cheap sites and access to staff shed by PFG available. All this with secured funding for next few years

Net Non-Standard Finance (LON:NSF) is rapidly going to become a scaled play in non-standard finance (albeit with dullest brand name ever). I think NSF's Stockopedia quality score is low because it is not scored at all on some Stockopedia criteria last time I looked - perhaps because it is still to young to market. Both Value and Quality should improve and thus go up sharply in next 12 months.

I would really appreciate anyone who can otherwise explain why is Non-Standard Finance (LON:NSF) is otherwise so lowly rated by Stockopedia vs other non standard comparator companies. Perhaps Graham interest in sector and an opportunity for a Stockopedia tutorial at same time.

By contrast PFG will see loads of customers take the opportunity to not repay and PFG's desperation to keep operational scale will lead to poor choices in a chaotic management /reprting structure. Both toxic to profit.

Rather than full M&A, I therefore wonder if PFG will rather sell off its doorstep lending operations as too toxic /difficult and focus on the credit card operations alone that still looks a good business. Although there was operational synergy expected, I think they are going to be in deep deep doo-doo in recovering their position in the field and what doorstep lending really gave them was cash/profit. If that is gone, how interested will they be to fight to get it back?

Net very optimistic about NSF potential in mid term (and thus a holder)

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andrea34l 8th Sep '17 21 of 39

In reply to post #216783

At this time, to me the announcements from housebuilders seem quite mixed. I thought the results from RDW looked very impressive, with a strong rise in completions, but others such as BVS and BDEV have static or even fewer completions than last year and profitability is reliant on improvements in margin or house sale prices.

I only hold BWY, who I think look very strong (although I sold half my holding at the last market wobble after a good rise in share price), but I am wary of holding many more companies with the ongoing uncertainty of Brexit. The BKG statement sounds quite guarded with caveats, and as regards RDW it is not just the director sale in the last few days but quite a lot of sales in H2 which I am a bit concerned about.

I wonder if those with a greater present away from London are likely to do better long-term...

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herbie47 8th Sep '17 22 of 39

In reply to post #216793

I think a lot of foreign investment has stopped in London, China has pulled 84% of their overseas property investments globally in the first half of 2017. Other investments are going outside London apparently mainly due to prices.

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herbie47 8th Sep '17 23 of 39

In reply to post #216798

Yes some fair points. I think there is a lot of the wrong type of housing, not everyone wants to live in a flat or can buy an executive house. I think the 1 million houses are either empty or second homes. There are certainly building many houses in the South East, it's one reason why I moved out, it's was getting more like London every year. That is a major problem in England about 1/3 the population live in the South East.

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willhampson 8th Sep '17 24 of 39

In reply to post #216833

I'm afraid that runs directly contrary to my experience in the City. I apologize if I'm mistaken on your source, but if its what I think it is; I believe it only applies to direct PRC sourced investment; not money funneled through HK (which is a primary financing structure) and use of SPVs. Add those in and you may find the figure is rather different. Anyway, probably not interesting for others so I'll stop here. All the best!

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barnetpeter 8th Sep '17 25 of 39

I always point to the debt position in the UK.

£68.5 billion The amount people owe on their credit cards. £1.344 trillion The level of secured debt in the UK, the highest it has ever been. In Oct, Halifax BOS is pushing up its overdraft rate by a massive percentage rate. Just the start.

Disney suggested flat profits last night and this newsletter has become "profit warning of the day". Not the authors' fault of course; but the mkts are very high to accommodate lots of warnings.

Selling some of my holdings and increasing my cash. Property prices paid at auction are falling away sharply in the South of England; just bought a RTB for cash for a cheeky cash offer that I refused to increase.

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daveinthelakes 8th Sep '17 26 of 39

In reply to post #216823

Thanks Zipmaster. I agree with the tenure of your post-I did not buy NSF in anticipation of a deal with PFG but have been a holder for over a year.

A company like NSF will always rate low on Stocko, new IPO from a standing start with no track record, big capital raises to buy in others. The figures are not there to justify a higher rating. I am unconcerned about the low rating in this instance. We have to project out where it is going. Not a huge fan of Hardman but their freely available forecast paints a more realistic view imo. I think the market will re-rate NSF over the next 6 months or so.

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Brian Hamilton 8th Sep '17 27 of 39

I think the way ahead in property shares is not with mainstream builders (where the easy money has been made) but with Telford Homes (TEF), Watkin Jones (WJG) and Inland Homes (INL).

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CliveBorg 8th Sep '17 28 of 39

In reply to post #216808

Strange that the East Midlands appears twice in the graph.

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browndav 8th Sep '17 29 of 39

I wondered what you think of REDDE Group. Their HY Results this week looked OK.

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Graham Neary 8th Sep '17 30 of 39

In reply to post #216803

Cheers Dom!

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FREng 8th Sep '17 31 of 39

In reply to post #216868

... and perhaps Northern Bear (LON:NTBR) (which I hold and which is down 6% today for no particular reason that I can see).

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herbie47 8th Sep '17 32 of 39

In reply to post #216878

East Anglia maybe the 3rd highest?

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Howard Marx 8th Sep '17 33 of 39

In reply to post #216898

I think youre right herbie.. it's the one region that is missing

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ricky65 8th Sep '17 34 of 39

I see Filta Group (LON:FLTA) +15.9%. Great "tennis ball" action as Minervini likes to call it.

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Gromley 8th Sep '17 35 of 39

Re Safestyle UK (LON:SFE) , a slight correction to :

Indeed, its market share has been growing, and it has been profitable, for over a decade.

In actual fact they restated their 2008 figures to GAAP and showed a pre tax loss of £300k (on turnover of £101m.

Admittedly this was after shelling out £1.4m to prop up a failed supplier, whilst they sought a replacement.

I point this out, not to be a smart Alec, because I think it's relevant to look out how they fared during the post 2007 recession, if one thinks that consumer expenditure could continue to be suppressed.

From the accounts at least the business doesn't look to dissimilar to the shape it was a decade ago (bigger of course). With a bit more efficiency of scale on overheads the operating margins are better , but it still looks a reasonable comparison.

The conclusion I draw from that parallel is that they look pretty unlikely to go bust even if things get worse, but there could be a substantial hit to profits in the near term and I agree there has to be a high likelihood of passing or cutting the dividend.

Buying today will probably look an absolute bargain in 3 or 4 years time, but buying in a few months I suspect might look more so. The previous high valuation against which some people are judging value just looks unreasonable to me.

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DMG2305 18th Sep '17 36 of 39

In reply to post #216908

Can anyone make sense of Filta Group's meteoric share price rise over the last week or so on no news that I can see?

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DMG2305 18th Sep '17 38 of 39

Thanks Soundbuy - it looks really pricey now 27X forecast earnings, it better keep growing!

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pone 7th Oct '17 39 of 39

Graham, not sure if you can support a format change, but I think given the discussion forum being so active after each of your posts, you would be better to have one stock per report. That way discussion would be focused on the one stock in each article. It would make these discussions much more valuable long term.

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 Are LON:SFE's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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