Happy Friday!

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

Cheers

Graham



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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