Description

Long Safestyle UK PLC

All values are given in Pounds

The Safestyle Group is a UK-focused retailer and manufacturer of PVCu windows and doors for the homeowner replacement market. The Group's business has grown from its founding in 1992 to become the largest company in the UK homeowner window and door replacement market.

The company went public at the end of 2013 at 1.30 pound and now, 4+ years later, we are at 1 pound.

Strangely enough, this company has been consistently profitable even through the years 2008-2009. This is because they are one of the lowest cost, if not the lowest cost, retailer and manufacturer of PVCu windows and doors. The margins are consistently higher than their national competitors, Anglian and Everest (and Zenith Staybrite went into administration recently). Their customer reviews are considerably better as well may I say.

Given that double glazing windows last for roughly 20-25 years, there is a constant need for the replacement of these windows. And while the replacement can be delayed for a few months or years, esthetic as well as functional reasons prohibit the indefinite postponement of a replacement. This somewhat reduces the discretionary nature of the investment by the consumer (as opposed to newbuild houses) and thus making it a less cyclical revenue stream then some other building products.

Over the years (since 2004) the company managed to almost triple their market share from 4.1% in 2005 to 11.2% in H1 2017 (although in a slightly contracting market). This was done at the cost of the large privately owned competitors, 2 of which have been consistently losing money over the last few years and one even entered administration last year.

A bit like the recent write-up from Howdens Joinery, the scale effects from centralized manufacturing of made to measure windows enhances the companies low cost “moat”. This efficient manufacturing process indeed enables the company to be very light on working capital, needing almost no inventory and making sure the company generates outsized Returns on equity.
In addition to the efficient manufacturing facilities, they operate a very light corporate structure, having self-employed installers, canvassers and even sales teams. They manage sales of 150 million with just 5 million in inventory excluding cash.

The self-employed sales team does have a drawback given that the company has a history of somewhat aggressive sales tactics.

Financially speaking though, the net effect is that the company has a pristine balance sheet and ample funds to do opportunistic acquisitions considering many of their competitors are facing difficulties. One of the competitors even needed a debt restructuring last year. This is also a very fragmented market where a large portion are local, family run businesses.

Financial Performance:

These are 10 year revenue and net profit numbers:

                             2007      2008      2009     2010      2011      2012      2013       2014      2015      2016

Revenue             106,6     101,3     92,9       94,7       98,5       110,2     124,78    136        148,9     163,1

Net profit           1,7          0,56       4,9          5,26       5,27       7,1          6,46       12,8       13,96     15,56

Average net profit over 10 Years (full cycle): 7.36 Million Pounds

These numbers include any one off charges, like a 5.5 Million listing cost in 2013 and some other minor stuff. In a way, this underestimates Safestyle’s earnings power over a full cycle, especially going forward.

Valuation

According to the latest trading update, the company has a net cash position of 12 Million Pounds. Given the 83 Million shares outstanding, the Enterprise value of the company is about 70 Million Pounds. Given an average net profit of around 7.3 Million over the last 10 years (not even considering Safestyles larger market share since then) and including 2007, 2008 and 2009, this is not too shabby. And especially considering the years 2007 and 2008 are not really representative of the companies true profitability.

This has to do with the background of the company.

Safestyle (subsidiary H.P.A.S. LIMITED) was originally formed to provide mortgages for right-to-buy council tenants. Purchasers were able to take advantage of the difference between the market value, on which the mortgage was based, and the discounted purchase price and were often minded to invest the equity released in home improvements.
The leads for the home improvements were sold to prospective suppliers. Soon after being founded, Safestyle started to follow up on the leads themselves rather than sell them to third parties and identified that double glazed replacement PVCu windows and doors were both popular and technically simple to install.

Over the next few years, the Group found itself focusing on the UK homeowner retail replacement market where price competition was not as severe as the new build and trade markets which, by comparison, suffered from low margins and less attractive payment terms. Management also began to focus its strategy away from the provision of finance in the wake of a tightening regulatory regime (many larger competitors however do provide financing to clients).

In the summer of 2008, management took the decision to formally integrate the window manufacturing operation within the Safestyle business and eliminate any duplicated costs. This integration was completed by April 2009.

That is why the underlying performance and net profit improved that much since 2009.

Management and insider ownership

The IPO was a way for management and directors to cash in, which is not my favorite way to enter an investment. The only director with a decent stake left in the company is Steve Birmingham, who owns 3.38% after selling almost 30% of his holdings at the end of last year. This is not really behavior which you like in a company and management, but the valuation somewhat makes up for this.

Company share buyback

In September 2017, after a disappointing trading update, Safestyle started a share-buyback program for an authorized amount of 2.5 Million pounds for a period of 1 month. Suffice to say, the company had bought back some peanut amount of shares (not even 200,000 Shares). That is just a complete disappointment and one could and should have expected more.

To wrap it up, you can buy an asset light, very profitable and low(est) cost manufacturer at what is perhaps a 15% earnings yield excluding cash due to some near term uncertainties. Safestyle UK should definitively be able to overcome these uncertainties given their solid balance sheet. This sounds like a decent investment opportunity.

Catalyst

* Uncertainty going away and return to profit growth
* competitiveness reducing due to competitors leaving the market