Safestyle Uk plc (LON:SFE) has announced that it has entered into an agreement with Mr Misra, who was a party to Safestyle’s dispute with NIAMAC Developments Ltd (trading as Safeglaze UK). The full details of the agreement will remain confidential but include a five year non-compete arrangement and the provision of services in support of the continued recovery of Safestyle. The consideration due will be based on strict performance criteria by Mr Misra in the period to Dec 2020 and Safestyle’s trading performance being ahead of current market expectations in FY19 (ZC currently forecasts £127.0m of revenue and PBT of £4.5m). The cash consideration will be up to £2.0m with an additional allotment of four million Safestyle shares, both will be paid in Q4 2020. We leave forecasts unchanged as any payment will be made outside the current forecast period. On current FY19 forecasts the shares trade on just 10.6x earnings with significant recovery potential.
Commercial agreement potentially signals a conclusive end to the intense competition that has impacted Safestyle’s performance: Today’s announcement follows on from Friday’s when Safestyle denied that it was in discussions with Safeglaze to acquire its business or assets. The Commercial Agreement includes a five year non-compete that should be taken positively. Safeglaze UK had directly targeted Safestyle’s customer base by poaching staff. Whilst difficult to attribute the exact loss of volume in H118 directly to Safeglaze the market was down mid-single digit against the c.28% loss experienced by Safestyle. Mr Misra will also provide services in support of the recovery of Safestyle. It can only be speculated what these services may include but the management team must be confident of the potential benefits. The consideration Mr Misra will receive, should he adhere to the terms of the agreement and Safestyle outperform current FY19 profit estimates (c. £4.5m PBT), is up to £2.0m in cash and four million shares, payable in Q4 2020. The dilution from the issue of shares will be less than 5% and the £2.0m cash payment should not prove a stretch on the assumption that performance is better than anticipated in FY19.
Recovery potential significant: The manufacturing cost advantage the business has against the other national players is still very much evident. Despite the difficult trading conditions across the industry and the loss of installation volumes in H118, Safestyle still managed to increase average prices by c. 2.8%. This suggests any recovery in volume should have a material impact to profitability. Current FY19 PBT estimate of £4.5m compares to peak profitability in FY16 of c. £20.0m.
Valuation: We believe that, should the improvement in forecasts and self-help measures come through, the shares offer substantial turn around potential trading on just 10.6x FY19 earnings with a conservative balance sheet.
