Safestyle UK
Year end IMS
Home in on growth potential
Household goods
Upward revisions to UK GDP growth expectations are a positive backdrop
31 January 2014
for a sustained housing recovery. Safestyle’s focused product and sector strategy is ideally placed to benefit from this. On current estimates, the company sits on an FY14 P/E of 11x, EV/EBITDA of 7x and 5% dividend
Price
yield. We suggest that the scope for earnings growth is greater than currently factored in and Safestyle has a sound financial and operating platform from which to achieve this. FY13 results are due 31 March.
Net cash (£m) at December 2013e
Market cap
£122m 4.3
Shares in issue
Revenue (£m)
PBT* (£m)
EPS* (p)
DPS (p)
P/E (x)
Yield (%)
12/11
98.6
7.0
6.8
0.0
23.2
N/A
12/12
110.2
9.5
9.1
0.0
17.2
N/A
12/13e
124.6
14.5
13.9
5.0
11.3
3.2
12/14e
129.6
15.0
14.4
8.0
10.9
5.1
Year end
157p
77.8m
Free float
90%
Code
SFE
Primary exchange
AIM
Secondary exchange
N/A
Share price performance
Note: *PBT and EPS are normalised, excluding exceptional items.
Industry leader with further market share increase A year end IMS (27 January) confirmed that Safestyle’s year ended in line with expectations and, following a 9.4% increase in installations in FY13, a revenue uplift of c 12% is flagged. This growth is above the overall industry rate of 4.5% and Safestyle’s market share increased (c 5%) for the ninth consecutive year, to 7.85%. This is understood to represent the leading share in a very fragmented market. Early signs for FY14 are positive with order intake in the first three weeks ahead of anticipated levels. Hence, we retain our view that Safestyle is well placed to capitalise on a recovering housing market and, in particular, rising homeowner repair, maintenance and improvement (RMI) spend.
Accentuating a recovery in UK housing activity After a prolonged housing recession, direct industry metrics (such as housing transactions and prices) and related economic data (falling unemployment and consumer confidence recovery) are all showing healthier readings than a year ago. In a longer-term context, current activity levels are still below average. We believe that Safestyle can magnify a volume recovery by gaining further market share with possible further upside from rising installation value, energy efficiency policy initiatives and other UK sub-demographic features.
%
1m
3m
12m
Abs
N/A
N/A
N/A
Rel (local)
N/A
N/A
N/A
52-week high/low
100p
167p
Business description Safestyle UK is a manufacturer and supplier of replacement PVCu windows and doors to the UK homeowner market.
Next events FY13 results
31 March 2014
Analysts
Valuation: 5% yield, growth key to further re-rating
Toby Thorrington
+44 (0)20 3077 5721
Safestyle has risen 57% since its IPO admission on 6 December. Consequently, on
Roger Johnston
+44 (0)20 3077 5722
unchanged estimates, the FY14 P/E rating is now 10.9x and EV/EBITDA 6.9x with a solid 5.1% yield. This yield is more than double its sector peers, rated significantly higher than Safestyle (equivalent P/E of 16.8x and EV/EBITDA of 10.7x). We acknowledge faster forecast earnings growth rates for these companies; at this stage, we have not reflected all of the above factors in our near-term forecasts, but there is clearly good potential for earnings growth above currently anticipated levels. Any upgrades are likely to narrow the current rating discount vs UK RMI peers.
[email protected] Edison profile page
Safestyle UK is a research client of Edison Investment Research Limited
Investment summary Company description: Replacement window and door supplier Safestyle offers exposure to the recovering UK housing market as a supplier of replacement PVCu windows and doors. Safestyle has a clear market position addressing the UK homeowner replacement window market. It is profitable, growing, cash generative and in a net cash position with good prospects for dividend distribution.
Valuation: Earnings growth key to rating expansion After a strong stock market debut, Safestyle’s strong cash generation and yield of 5% are key investment attractions. At 157p, FY13 P/E and EV/EBITDA ratings on our current forecasts are 11.3x and 7.6x respectively. One year out, these become 10.9x and 6.9x reflecting only modest earnings growth but good cash generation. Consensus estimates show other UK sector peers with faster earnings growth and they sit on forward rating premiums of over 50% compared to both P/E and EV/EBITDA compared to Safestyle. We believe that the prospects for faster earnings growth for Safestyle are good and, as evidence appears, this in turn could translate to a further re-rating and market outperformance.
Financials: Cash backed profits support healthy dividend Without raising any new money for the company on IPO in December, we expect Safestyle to have ended FY13 in a c £4.3m net cash position. This will be after exceptional cash spend acquiring head office and manufacturing site freeholds (£3.8m), settling legacy items (£3.1m tax), paying IPO costs (c £2m) plus the pre-IPO dividend (c £7m). We estimate that underlying positive free cash flow in FY13 approached £10m. We currently anticipate a conservative 4% growth a year in installations and have assumed that the number of frames per installation and the revenue per frame are stable. With broadly similar operating margins modelled (gross margin improvement offset by higher marketing spend), no interest contribution assumed and an unchanged tax charge, the headline growth translates to similar progress in EPS. With future free cash flow generation in the order of £11m a year, Safestyle should be able to sustain a payout ratio above 50% (or 1.8x cover), which equates to c £6.2m (or 8p dividend per share) distribution for FY14.
Sensitivities: Concentrated focus on the UK homeowner Safestyle operates and sells only in the UK, focusing solely on the homeowner segment. It has demonstrated an ability to grow volumes in difficult economic conditions, but a sustained period of growth and broadly based wealth creation would be a favourable long-term business indicator. Current consumer confidence is considered to be fragile but has certainly improved year-on-year. The replacement window and door market is an established one, though the fabricator and installer elements of the supply chain remain fragmented. Hence, competition can occur on a localised or wider basis. Safestyle is a substantial and well financed business with an efficient manufacturing base that should be a source of relative strength in its markets. This proposition should also enable Safestyle to adapt to periodic regulatory change within the industry (typically driven by building and/or energy efficiency initiatives). At the company level, a concentrated supply chain and manufacturing set-up bring scale benefits but also business risk. Industry fragmentation suggests that alternative supply arrangements may be available though, we would imagine, not without business disruption. Safestyle’s self-employed agent network is not unique but brings additional management challenges.
Safestyle UK | 31 January 2014
2
Supplier of replacement PVCu windows and doors Safestyle manufactures and supplies replacement PVCu windows and doors to the private homeowner segment of the UK housing market. It generates sales and installs finished double glazed units through a network of self-employed agents. Yorkshire based, national reach: The company is based in Bradford and has manufacturing facilities in Wombwell (near Barnsley) with 10 installation depots and 29 sales offices located nationwide across England and Wales. The manufacturing process co-ordinates the conversion of PVCu profiles into bespoke double-glazed window frames (and doors) with a co-located glass conversion plant (which sizes and tempers glass from which it produces sealed units). Each item is identified as a specific job against a specific sales order during production and, hence, limited inventory is required. The entire finished product is fabricated in-house using a limited number of bought in components and Safestyle maintains quality control over the whole process. Manufactured units are batched by job and despatched to the nearest depot to the installation prior to collection and fitting by one of Safestyle’s approved installers. Self-employed model for sales and installation: Safestyle’s tiered sales model uses traditional media and internet marketing to support a network of c 2,000 self-employed agents. Canvassers (c 800 door-to-door, c 100 telephone-based) generate leads for appointments. These are validated and passed to sales agents (560) who meet the homeowner; if a successful sale is made, this is followed by a visit from a surveyor (65) and, ultimately, an installer (475). These roles are all fulfilled by external agents, but Safestyle has procedures in place, validating each stage of the process. Customers – who contract directly with Safestyle – are also protected by consumer and financial services legislation and building regulations as well as Safestyle’s 10-year product guarantee. The business has consistently grown market share over the last 10 years, increasing installation numbers year-on-year in nine of these (the exception being 2008). Over the same period, industry installations declined in eight out of those 10 years and 2013 (which exceeded 2012) was still some 30% below 2004 levels. Exhibit 1: Safestyle annual installations and market share 2004-13 60,000 50,000 40,000 30,000 20,000 10,000 0
2004
2005
2006 Safestyle
2007
2008
2009
2010
2011
2012
2013
9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00%
Market Share % (RHS)
Source: Safestyle UK
Focused strategy and management continuity: CEO Steve Birmingham (joined in 1999) and FD Mike Robinson (2008) have successfully integrated manufacturing operations within the group and executed their strategy of supplying a narrow range of replacement products solely to the homeowner housing segment. Ahead of the IPO, these two executives were joined by two NEDs experienced in property and building products to form the Safestyle board.
Safestyle UK | 31 January 2014
3
Market scale and industry structure The 2011 census recorded the population of England and Wales to be 56.1m with a housing stock comprising of 23.4m dwellings (compared to the 1981 equivalents of 48.5m and 17.7m respectively). The double glazing industry became established during this period and PVCu became the prevalent system from the late 1980s onwards. House building regulations cover the installation of these systems in newbuild homes, but replacement activity for existing homes was not brought under Building Control regulations until 2002. Industry body FENSA (which provides administration, certification and monitoring of its Competent Person Scheme for installers in England and Wales) was created shortly afterwards and installation data is available from 2004. Survey data suggested that the penetration of double 1 glazing in England had reached 76% by 2011.
6
1200
5
1000
4
800
3
600
2
400
1
200
0
2004
2005
2006
2007
Window frames
2008
2009
Door frames
2010
2011
2012
2013
Thousands
Millions
Exhibit 2: Installations and volumes of replacement doors and windows in England & Wales
0
Total installations (RHS)
Source: FENSA, Safestyle UK
Between 2005 and 2007, the number of replacement installations of windows and doors ran at just below 1m (covering c 3.7-3.9m window frames and over 800k doors) a year. This clearly fell between 2008 and 2010 before showing greater stability since at c 700k installations (2.5m 2
windows, 550k doors). Safestyle estimates that 90% of installations are PVCu. Insight Data estimated the 2012 market value to be £3.2bn at the fabricator level (c 40% for private home improvement). Total installed value was an estimated £5.2bn. We note that 2013 showed the first sign of recovering industry volumes with frames up 3.1%, driven by a 6.8% y-o-y increase in H2. This substantial industry is serviced by
a dozen or so systems houses (ie profile extruders), the largest five – including Duraflex and Eurocell – accounting for just over half of the market,
1,000+ insulated glass unit manufacturers,
c 2,000 PVCu window and door fabricators, and
12,500 registered installer companies.
Safestyle considers that the largest three fabricators (ie itself, Everest and Anglian), together have c 20% market share, the remainder being spread among 20-30 regionals and a large number of local traders. Everest and Anglian both have wider product ranges (eg roofline and driveway products, with other home improvement lines including solar and kitchens) compared to Safestyle. Both are private companies (with Everest owned by Better Capital since 2012 and Anglian by a bank consortium since 2008). 1
www.nationwide.co.uk/NR/rdonlyres/0B908212-2CE5-43A9-B33AB8A9FC7BFD00/0/TheAverageHouseApr2013.pdf DCLG data
2
www.insightdata.co.uk
Safestyle UK | 31 January 2014
4
Driving growth when homeowner numbers are static We have already seen how Safestyle has grown (Exhibit 1) when industry volumes have declined (Exhibit 2) and now appraise the company’s growth prospects. Our previous note (Transparent value) defined Safestyle’s target market as c 15m owner-occupied (O-O) dwellings in England and 3 Wales (c 64% of total 2011 dwellings ). As well as being the largest residential segment, it also has other positive features compared to the other segments including, typically, more rooms/bedrooms and higher proportions of older (ie 35+) and employed occupants with longer average length of tenure. As owner and bill payer, these potential customers have a clear vested interest in enhancing both property value and energy efficiency. Although this segment is large the absolute number of O-O dwellings plateaued at around current levels over the decade to 2011 (falling to 64% of the total housing stock – from the 2001 peak of 69% – reflecting the growth of other tenure types). While this may partly reflect economic and banking effects in recent years, we think it reasonable to assume that homeowner numbers remain stable. Given this, what are Safestyle’s growth drivers?
Recovering activity levels Using FENSA data alone, the number of annual installations would have to increase by 42% to regain 2004 (ie pre housing bubble peak) levels. Returning to our initial analysis, we illustrated that a 70% double-glazing penetration rate and a 20-year product lifecycle suggested a steady state annual window replacement market of 525,000 dwellings. FENSA data (c 1m installations in 2004) infers a higher figure; using a 64% O-O percentage suggests c 640,000 dwellings annually but FENSA-certified work is likely to have a greater bias to the O-O segment. These figures are not inconsistent and could be narrowed under other assumptions, but would seem to represent a reasonable medium-term range expectation. UK housing transactions and house prices have both increased year-on-year in the last two years and are positive lead indicators for RMI spending activity. Since 2000, UK housing transactions have exceeded 1.5m on five occasions. In a longer-term context, 2013 UK housing transactions (at just under 1.1m) were still 20% below the annual average since 1970. So, while some recovery has been seen, activity is still below normal levels. Exhibit 3: UK property transactions
Exhibit 4: UK house price trend
2,500
Percentage change
000s
2,000 1,500 1,000 500 0
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
Source: HMRC
30 25 20 15 10 5 0 -5 -10 -15 -20 Jan-03 Jun-04 Nov-05 Apr-07 Sep-08 Feb-10 Jul-11 Dec-12
Source: ONS
In the year to November 2013, average house prices increased by 5.6% in England and 5.4% in Wales. All nine English regions saw growth and prices in three of these are now above their previous peak (in 2008). The Welsh price index has recovered to just 4% below peak levels. 3
www.ons.gov.uk/ons/rel/census/2011-census/detailed-characteristics-on-housing-for-local-authorities-inengland-and-wales/short-story-on-detailed-characteristics.html
Safestyle UK | 31 January 2014
5
Consumer confidence has shown some recovery and unemployment appears to be trending down. These features are all supportive of further housing market recovery. Exhibit 5: UK consumer confidence
9.0 8.0 7.0
% unemployed
Survey value
5.0 0.0 -5.0 -10.0 -15.0 -20.0 -25.0 -30.0 -35.0 -40.0 -45.0 Dec-03
Exhibit 6: UK unemployment rate
6.0 5.0 4.0 3.0 2.0 1.0
Jun-05
Dec-06
Jun-08
Dec-09
Jun-11
0.0 Dec-03
Dec-12
Source: GfK NOP
Jun-05
Dec-06
Jun-08
Dec-09
Jun-11
Dec-12
Source: ONS
Consumer confidence is still considered to be fragile but has recovered towards its long-term average reading (ie -13 in January vs -9.7 between 1981 and 2013). The UK unemployment rate (at 7.1% for November) is back down to levels last seen in March 2009.
Increasing market share (including geographic expansion) Exhibit 1 showed Safestyle’s volume and market share growth since 2004. In 2013, Safestyle undertook c 55,000 installations of, in total, c 250,000 window and door frames, representing annual growth rates of 9.4% and 7.5% respectively. Consequently, Safestyle’s market share of total FENSA installations grew to 7.8% (and that for frames to 8.1%) or possibly a couple of points higher if looking at FENSA O-O installations only. Any further share increases can magnify market recovery. Management intends to achieve this partly through greater presence in the South East. This is the largest region, accounting for 16% (or 2.44m) of the total number of O-O residential properties in England and Wales. While there may be increased sales and marketing spend – and possibly additional depot and/or sales office openings – there is obvious scope to raise overall market share. Exhibit 7: Regional distribution of owner occupied dwellings in England and Wales England and Wales South East North West East London South West West Midlands Yorkshire and the Humber East Midlands Wales North East
Total dwellings 23,366,044 3,555,463 3,009,549 2,423,035 3,266,173 2,264,641 2,294,909 2,224,059 1,895,604 1,302,676 1,129,935
Owner-occupiers 15,031,914 2,443,797 1,957,351 1,655,621 1,618,315 1,544,074 1,504,324 1,435,200 1,287,409 883,130 702,693
O-O % 64% 69% 65% 68% 50% 68% 66% 65% 68% 68% 62%
% total O-O 16% 13% 11% 11% 10% 10% 10% 9% 6% 5%
Source: DCLG 2011 Census, DC4202EW
Increase in installation value Since 2004, Safestyle has experienced a gradual reduction in frames per order (from 5.1 to 4.4 in 2013). There may be a number of mix and economic factors at work here but a reversal of this trend – possibly aided by greater presence in the South East and South West markets – would further enhance revenue growth, other things being equal. Pricing is affected by input pricing, competition and discounting activity and we do not have visibility of industry trends in this regard.
Safestyle UK | 31 January 2014
6
Favourable demographic effects Much of the debate thus far has concerned a recovery in volumes towards normal activity levels and how other effects can magnify this. The recovery need not be in a straight line and may be further influenced by other factors. Population growth (including net migration) is the most obvious example here; in the near term this is more likely to be beneficial for the new housing market but where the overall housing stock is rising so should the long-term demand for replacement windows and doors (assuming a stable O-O percentage). Exhibit 8 shows private new building activity in England and Wales since 1970. The 2.8m properties between 10 and 30 years old (ie built between 1984 and 2004, averaging c 139,000 per annum) are theoretically about to enter the replacement market for the first, or possibly second, time.
Number of homes built pa
Exhibit 8: New private dwellings built in England and Wales 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 1969-70 1973-74 1977-78 1981-82 1985-86 1989-90 1993-94 1997-98 2001-02 2005-06 2009-10
Source: DCLG
This last big increase in O-O tenure occurred between 1984 and 2002 when almost 3.4m additional dwellings were added, with the Right to Buy policy making a material contribution to this. Although available industry data does not go back to this period, we speculate that this period may also have seen higher than average replacement window and door activity. This fits with the development and increasing penetration of double glazing during this period. Consequently, 20-30 years on, one might expect to see a mini-bulge demand effect from this. Life expectancy continues to rise and the UK has an ageing population profile. This age demographic of homeowners (over 65s represent an estimated 30% of the tenure total) is likely to translate to higher transaction activity (eg through down-sizing or inheritance) as a catalyst to further RMI spending.
Energy efficiency policy and awareness Highly visible increases in domestic energy bills heighten household awareness of energy efficiency and desirable savings. Greater government policy emphasis in this area is already embedded in home surveys and building regulations. Thus far the Green Deal, the latest scheme to encourage homeowners, has not really gained traction, possibly due to poor implementation and funding availability. However, such initiatives are destined to retain a high profile in energy and environmental policy. Consequently, this might be expected to be an incremental growth driver for the window and door industries, especially where incentives are available to the homeowner.
Segment and/or products diversification We are aware that Safestyle has previously addressed segments other than homeowners in the past. Although management has given no indication that such a move is imminent, Safestyle could conceivably expand beyond its core owner-occupied residential market into adjacent ones. This might include the private rental, social housing or newbuild segments or range extension (eg conservatories). Challenges associated with such moves include alternative sales/customer engagement strategies, different building regulations and specialist design or installation.
Safestyle UK | 31 January 2014
7
Sensitivities Safestyle addresses a very specific segment of the UK home improvement market and sells direct to the end user. Consequently, the general consumer environment as well as housing industry and company specific components make up Safestyle’s overall profile and prospects. Overall, we believe that Safestyle’s record in gaining market share and its intention to increase further should result in market outperformance and magnify positive economic cyclical effects post recession.
Market demand levels depend heavily on UK consumer spend Windows and doors are clearly functional items with a natural product lifecycle, but the timing of replacement (for reasons other than damage or complete failure) is a discretionary spending choice. Safestyle’s sales are substantially (c 80%) on cash terms so personal disposable income, savings levels and alternative demands (eg house, car, holiday) are all influences. Following a period of austerity, UK consumer confidence has improved from the lows but is still considered to be fragile. A period of sustained wealth creation – including a resumption of real earnings growth and rising house prices – while retaining historically low interest rates is a key long-term business driver. We believe that this would help arrest the declining proportion of owner-occupiers and, indeed, help to raise the absolute number of dwellings of this tenure type.
Competition on a broad front and regulatory compliance Safestyle installations have been made throughout England and Wales via the company’s 10 installation depots, 29 sales offices structure. In this fragmented market, competitor activity can be local, regional or via campaigns from the other national players (ie Anglian, Everest). Industry marketing typically exhibits seasonal peaks (especially Q1 and Q3) and uses heavy discount messaging to stimulate leads. Safestyle has a tiered marketing approach and needs to remain responsive on a local basis to sustain and further develop its market shares. Increased presence in the South and South East markets has been clearly flagged and the response of other incumbent participants in this region will need to be monitored. Industry regulations (for buildings and FENSA certification) set standards for product quality, selling and installation and these may be expected to see periodic change. Safestyle is a substantial and well financed business with full manufacturing control and a structure in place to manage its network of self-employed agents. Consequently, it should be in a strong relative position to contribute to industry debate, be responsive to change and implement best practice to maximise operational efficiency.
Company supply concentration and managing network agents We consider that having a single manufacturing site bringing together frame and sealed unit production in a co-ordinated process is a significant business strength. Safestyle also generates scale economies by concentrating purchasing of core items (ie profiles, glass and fittings) with a small number of suppliers. Clearly, disruption to either line could have a business-wide impact though a temporary switch to other fabricators (including systems houses) and/or other component suppliers is a possibility. We imagine that volume throughput would have to be managed and scaled down somewhat under this scenario and result in higher unit costs. The self-employed agent network of sales lead generators and installers is advantageous, raising the proportion of variable costs to accommodate volume variability. This has worked well for Safestyle, as evidenced by the volume growth achieved while those for the industry declined. Arguably, Safestyle could expand its network by maintaining staff to agent ratios as the latter numbers grow. Churn, particularly in better market conditions when alternative opportunities increase, does have business implications and so needs to be managed. At some point, Safestyle may need to add staff to continue to run these important functions effectively.
Safestyle UK | 31 January 2014
8
Valuation After a very good stock market debut, Safestyle’s strong cash generation and yield of 5% are key investment attractions. We believe that the prospects for faster earnings growth than we are currently modelling are good and this in turn could translate to a further re-rating.
Cash and dividend attraction with faster EPS growth potential Safestyle came to AIM on a value rating (100p: FY13 P/E ratio of 7.2x and yield of 5%) and, since its 11 December admission, has risen by 57% (159p; P/E ratio 11.3x, yield 3.2% on unchanged estimates). Our current earnings growth expectations are fairly modest at c 4% for FY14 and FY15. Given the stage of the cycle and the other potential growth drivers identified above, we believe that Safestyle could be capable of delivering double-digit earnings growth (towards a PEG of 1x). Evidence of achieving greater penetration in the South East market, a continuing increase in market share and, arguably more important, a wider rise in consumer sentiment would support this and lead us to upgrade our forecasts. We have seen a sharp improvement in consumer confidence since May 2013 (see Exhibit 5), although the last three monthly readings (to January) have softened slightly. For now, we retain conservative growth estimates until this series’ trend is clearer. The EV/EBITDA multiples have also risen and now stand at 7.6x for FY13, falling to 6.9x and 6.4x over the next two years. Given the gentle profit accretion forecast (in line with revenue growth), this contraction is driven by cash generation with an expected c £11m increase in net cash to £15.3m from end FY13 to end FY15. This is after distributing an estimated £12.4m in dividends over the next two years. With a prospective full year FY14 dividend of 8p, the associated yield of 5.1% and strong cash generation are key investment attractions ahead of an increase in the rate of earnings growth. An expected FY13 final dividend of 5p alone equates to a 3.2% yield.
Earnings growth driving premium ratings In our previous note (11 December) we identified four UK quoted peers with primary exposure to UK RMI spending activity. Safestyle and Topps Tiles are both B2C business (though the latter is a retailer), while Howden, Norcros and Travis Perkins are mainly B2B (the first two are also manufacturers, while TPK is a builders’ merchant). Exhibit 9: Comparative valuation – selected UK-quoted RMI companies Calendar Safestyle Howden Joinery Norcros* Topps Tiles* Travis Perkins
Price (p) 157 335 23 149 1,742
2012 17.2 23.0 12.6 28.8 18.3
P/E ratio (x) 2013 2014 11.3 10.9 21.0 18.9 11.8 11.5 26.5 21.9 17.4 14.8
2015 10.5 17.4 N/A 16.6 13.0
2012 11.2 13.9 9.0 17.2 13.2
EV/EBITDA (x) 2013 2014 7.6 6.9 13.1 11.8 7.9 7.4 16.9 13.4 11.3 10.1
2015 6.4 10.8 N/A 11.3 9.1
Source: Edison Investment Research, Bloomberg. Note: *Calendarised. Prices as at 30 January.
This peer group is implicitly expected to deliver faster earnings growth and this is reflected in 35%+ P/E and EV/EBITDA discounts for Safestyle. It has a similar forecast earnings growth profile and rating to Norcros. The other companies are all expected to report double-digit earnings growth. We consider Howden (kitchen fabricator; a higher ticket item with similar product lifecycle to windows) to be the nearest peer and it currently trades on an FY13 P/E ratio of 21.0x and 18.9x for FY14. EBITDA multiples on the same basis are 13.1x and 11.8x. These peer growth rates possibly support our assertion that our Safestyle estimates are conservative. We would expect Safestyle to re-rate further and narrow the rating discounts if EPS growth can be raised to double-digit levels. The share prices of these peers have all performed well in absolute and relative terms over the last 12 months. The forthcoming results season should provide further insight into current market trends. On a yield basis, Safestyle compares favourably with this peer group (5.1% versus 1.9% average).
Safestyle UK | 31 January 2014
9
Financials In a year end IMS (27 January) management reiterated that FY13 revenue and profit is expected to be in line with its expectations. Our revenue forecast is consistent with the c £124m level indicated and, with the associated profitability unspecified, we leave our existing estimates intact. The company reports that FY14 has started better than anticipated without elaborating further.
Revenue growth and operating margin stability Revenues are substantially comprised of the proceeds of the sale of manufactured and installed windows and doors. The proportion of cash to financed sales is broadly 80:20. Safestyle reports revenue from financed sales adjusted for commission received (from finance providers) and promotional (effectively subsidised) finance costs. FCA regulatory changes (from 1 April 2014) suggest that the latter will increase and this will marginally offset underlying FY14 installed product revenue growth (by c £1m). We believe that having a high proportion of cash sales to owner occupiers has been a positive contributor to low bad debt experience (0.2% of sales). By managing installation dates – to balance fabrication activity – seasonality is not considered to be material. Gross margins after manufacturing costs, direct selling commissions and installer costs have been in the 34.7% to 36.8% range over the last three financial years and an increasing proportion of selfgenerated leads could enhance this further. Over the same period, the operating margin range has been 7.7% to 9.0%. Safestyle achieved 12.4% in H113, though we anticipate higher marketing spend in H2 and beyond, though lower lease costs from FY14 may partly offset this.
Cash positive and cash generation to fund healthy dividend At the end of H113, Safestyle had a £9.9m net cash position, with some lease financing and no bank debt (or facilities required). We expect Safestyle to have settled a historic tax liability (£3.1m) and acquired its head office and manufacturing facility freeholds (£3.8m) in H213. After other positive cash flow effects, we expect the company’s end FY13 net cash to be c £4.3m. Thereafter, rising profits with limited working capital requirements owing to supply chain and lean manufacturing process management should support healthy levels of operating cash flow (c £15m pa). After normal levels of tax and capex (at or slightly above depreciation of c £1m) this should equate to free cash flow of c £11m in FY14 and FY15. Dividend cover of 1.8x cover implies an 8p dividend (or 5% prospective yield) for its first full year as a listed company. A 5p final is anticipated for FY13. No new funds were raised for the company from the IPO.
Freeholds acquired, but limited working capital required Intangible assets are the dominant balance sheet item, primarily goodwill of £22.1m (arising on a majority shareholding buyout in 2005) with no impairments during the three years prior to IPO. At the point of IPO, plant and machinery, office equipment and motor vehicles formed the lion’s share of tangible fixed assets (net book value £3m as at 30 June 2013). The end FY13 balance sheet should also reflect the acquisition of the freehold for both the Bradford head office and Wombwell manufacturing facilities referred to in the cash flow section above. Trade working capital (ie inventory plus trade debtors less trade creditors) was £1m at the end of June, less than 1% of our expected FY13 revenue. While this was above the level at prior year ends, the short-term capital required to fund growth appears to be limited. A 10-year product guarantee is backed by provisioning (equal to expected future costs discounted back to present value). In FY12, £0.8m was provided for this purpose, with a £2.3m carried provision at year end. Safestyle operates a money purchase (defined contribution) pension scheme and has no deficit exposure.
Safestyle UK | 31 January 2014
10
Exhibit 10: Financial summary 2010 IFRS
2011 IFRS
2012 IFRS
2013e IFRS
2014e IFRS
2015e IFRS
94.7 (59.9) 34.8 9.7 8.6 (0.4) (0.3) 0.0 0.0 7.9 7.9 (2.7) 5.3 5.3
98.6 (63.9) 34.7 8.7 7.5 (0.2) (0.3) 0.0 0.0 7.0 7.0 (1.8) 5.3 5.3
110.2 (72.0) 38.2 10.4 9.5 0.0 0.0 0.0 0.0 9.5 9.5 (2.4) 7.1 7.1
124.6 (80.0) 44.5 15.5 14.5 0.0 0.0 0.0 (4.7) 14.5 9.8 (3.7) 10.8 6.1
129.6 (82.6) 47.0 16.2 15.0 0.0 0.0 0.0 0.0 15.0 15.0 (3.8) 11.2 11.2
134.7 (85.5) 49.3 16.8 15.6 0.0 0.0 0.0 0.0 15.6 15.6 (3.9) 11.6 11.6
Average Number of Shares Outstanding (m) EPS - normalised (p) - company EPS - FRS 3 (p) Dividend per share (p)
77.8 6.8 6.8 0.0
77.8 6.8 6.8 0.0
77.8 9.1 9.1 0.0
77.8 13.9 7.9 5.0
77.8 14.4 14.4 8.0
77.8 14.9 14.9 8.3
Gross Margin (%) EBITDA Margin (%) Operating Margin - Edison (%)
36.8 10.3 9.0
35.2 8.8 7.7
34.7 9.4 8.6
35.8 12.5 11.7
36.3 12.5 11.6
36.6 12.4 11.5
26.1 22.6 3.4 0.1 7.3 0.8 1.9 4.5 (14.3) (11.8) (2.5) (6.2) (3.6) (2.6) 12.9
25.3 22.6 2.5 0.1 4.6 0.9 2.4 1.3 (9.4) (8.9) (0.5) (2.8) (0.5) (2.3) 17.7
25.7 22.6 2.9 0.1 12.1 1.1 4.3 6.7 (10.2) (9.8) (0.5) (2.8) (0.5) (2.3) 24.8
29.9 22.6 7.1 0.2 9.1 1.2 2.8 5.1 (11.9) (11.6) (0.3) (2.6) (0.4) (2.2) 24.5
30.2 22.6 7.4 0.2 14.8 1.2 2.9 10.8 (13.0) (12.6) (0.3) (2.6) (0.4) (2.2) 29.5
30.6 22.6 7.8 0.2 20.2 1.3 2.9 16.0 (13.6) (13.2) (0.3) (2.6) (0.4) (2.2) 34.7
13.9 (0.4) (1.7) (1.0) 0.0 0 (0.5) 10.3 10.9 0 (1) 1.5
5.4 (0.2) (2.3) (0.1) 0 0 (0.4) 2.4 1.5 0.0 (0) (0.3)
8.7 0.0 (2.0) (0.7) 0 0 0.0 6.0 (0.3) (0.5) 0 (5.8)
15.2 0.0 (5.1) (5.1) 0.0 0.0 (6.4) (1.4) (5.8) (0.3) 0 (4.3)
16.7 0.0 (3.7) (1.5) 0.0 0.0 (5.8) 5.7 (4.3) 0.0 (0) (10.0)
16.7 0.0 (3.8) (1.6) 0 0 (6.1) 5.3 (10.0) 0.0 (0) (15.3)
Year end 31 December
£m
PROFIT & LOSS Revenue Cost of Sales Gross Profit EBITDA Operating Profit Net Interest Other Finance Intangible Amortisation Exceptionals Profit Before Tax (norm) Profit Before Tax (FRS 3) Tax Profit After Tax (norm) Profit After Tax (FRS 3)
BALANCE SHEET Fixed Assets Intangible Assets Tangible Assets Investments Current Assets Stocks Debtors Cash Current Liabilities Creditors Short term borrowings Long Term Liabilities Long term borrowings Other long term liabilities Net Assets CASH FLOW Operating Cash Flow Net Interest Tax Capex Acquisitions/disposals Financing Dividends Net Cash Flow Opening net debt/(cash) HP finance leases initiated Other Closing net debt/(cash)
Source: Edison Investment Research, company data
Safestyle UK | 31 January 2014
11
Contact details
Revenue by geography
Style House 14 Eldon Place Bradford BD1 3 AZ United Kingdom
%
100% UK
01274 735563 www.safestyleukplc.co.uk/ CAGR metrics EPS 2011-15e EPS 2013-15e EBITDA 2011-15e EBITDA 2013-15e Sales 2011-15e Sales 2013-15e
Profitability metrics 21.9% 28.0% 17.8% 27.0% 8.1% 10.6%
ROCE 14e Avg ROCE 2011-14e ROE 14e Gross margin 14e Operating margin 14e Gr mgn / Op mgn 14e
Balance sheet metrics 58.4% 54.7% 38.0% 36.3% 11.6% 3.1x
Gearing 14e Interest cover 14e CA/CL 14e Stock days 14e Debtor days 14e Creditor days 14e
Sensitivities evaluation N/A N/A 1.1 3.5 2.8 24.9
Litigation/regulatory Pensions Currency Stock overhang Interest rates Oil/commodity prices
Management team CEO: Steve Birmingham
FD: Mike Robinson
Steve Birmingham joined as group operations director in 1999, becoming MD in 2007 and CEO subsequently. He is a qualified chartered accountant.
Mike Robinson has been group FD since 2008. He has a range of financial experience within industry and private equity. Former roles include UK finance director with RR Donnelley. He is qualified as an FCMA.
Chairman: Steve Halbert Currently chairman of United House Group and Consumer Champion Group (both private companies) and, previously, at GVA Grimley Holdings. He was formerly corporate finance partner and board member at KMPG LLP, as head of UK M&A and chairman of US operations. He also has experience as CEO of a quoted surveying/construction services company. Principal shareholders
(%)
Schroders Henderson Global Investors Investec Asset Management Premium Fund Managers AXA Hargreave Hale Diverse Income Trust
9.3% 9.1% 6.9% 5.8% 5.1% 5.0% 3.1%
Companies named in this report Howden Joinery, Norcros, Topps Tiles, Travis Perkins
Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is not regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com DISCLAIMER Copyright 2014 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Safestyle UK and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is not registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE [2013]. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent. Frankfurt +49 (0)69 78 8076 960 London +44 (0)20 3077 5700 Schumannstrasse 34b | 31 January280 High Holborn Safestyle UK 2014 60325 Frankfurt London, WC1V 7EE Germany United Kingdom
New York +1 646 653 7026 245 Park Avenue, 39th Floor 10167, New York US
Sydney +61 (0)2 9258 1161 Level 25, Aurora Place, 88 Phillip Street, Sydney NSW 2000, Australia
Wellington +64 (0)4 8948 555 Level 15, 171 Featherston St Wellington 6011 New Zealand
12
