The new Safestyle UK plc (LON:SFE) management team has been in situ for eight weeks and post a thorough review of the business has released a trading update. Whilst trading in H1 has broadly been in line with previous expectations the new team has taken a more prudent view on recovery in H2 18. This leads to revenue estimate falling to c. £120.0m (prev. £128.0m) in FY18 and to £125.6m in FY19 (prev. £129.0m). The impact to profitability in FY18 is exacerbated by revised expectations in terms of gross margin and operating costs. ZC forecasts profit after tax to decline to a loss of £3.5m, previous estimate was for a profit of £3.5m. Action taken in terms of costs in FY19 mean profit estimates decline to £4.5m (prev. £5.1m). Lower profit and increased exceptional costs now mean net cash estimate of c. £12m in FY18 becomes a broadly break-even position. Importantly, order intake in the last few weeks has stabilised and is showing a steady improvement, pricing remains robust and the capabilities of the business in terms of sales, canvas and installation are being rebuilt.
Safestyle has faced exceptionally tough trading conditions but the recent improvement in order book suggests FY19 will show an improvement: The weak UK consumer market back drop has been exacerbated by the aggressive new competitor and whilst today’s further revision to numbers, post the trading update in April, is disappointing it shows the new management team is making its mark. There are also small positives that can be taken operationally. The recent improvement in order book is telling as the business rebuilds its sales, canvas and installation functions. Staff numbers are increasing again in key demand areas, this is having a short-term cost impact. The improving run rate should mean H2 trading is broadly flat in terms of profitability which bodes well for our FY19 profit forecasts (full breakdown of changes to forecasts can been seen in Exhibit 1 on page two).
Pricing remains solid, volume recovery the key: Despite the end market and competition, pricing in FY17 remained solid increasing 7.6%. This has continued into FY18. We had been concerned that Safestyle was eroding its competitive position by increasing prices against the other national players. However, our understanding is that the incumbent players have been increasing prices at a comparable rate and the new management team is focused on maintaining the company’s value focus. An improvement in volumes, either as a consequence of the end market improving or winning back market share, should feed through to material increase in forecasts.
Zeus Capital Valuation: Should the improvement in forecasts come through as we envisage Safestyle UK plc shares offer substantial turn around potential trading on just over 9x FY19 earnings with a conservative balance sheet.
