In-line update for FY14
With a year-end update in line with existing guidance, Safestyle U (LONDON:SFES) appears to be entering FY15 in reasonably good shape. The new financial year brings opportunities and some cost challenges – and we assume flat gross margins now – but an uptick in UK consumer confidence, if sustained, should help to underpin further growth. FY14 results are due on 26 March.
FY14 ends in line with guidance
An in-line IMS noted a 7.0% increase in frame volumes and installed orders +4.7%. Implicitly, H2 growth rates were slightly below their H1 equivalents (+8.0% and +4.8% respectively), although Q1 was particularly strong. We suspect that business conditions and performance have been steady and solid over Q2-Q4. Industry volume data have been distorted by certified installer registration (from end June 2014), but Safestyle appears to have nudged up its UK market share again (to 8.48%), extending a well-established pattern.
Consumer confidence to be a key driver
Stronger consumer confidence is yet to be fully established, although the latest GfK survey was better than anticipated (including a marked increase in its ‘major purchases’ index). Low inflation and improving average earnings data are both supportive of further growth in demand for the company’s products, in our view. Orders were +3% y-o-y at the end of FY14 (and against tough comparatives), but management remains cautious on FY15 market development at this stage. Certain cost pressures (eg sales and marketing, depot expansion) and, this year, possible May election effects on consumer behaviour are the prime sensitivities. We have retained revenue expectations, but now assume flat gross margins in all three estimate periods, reducing PBT by £0.4m in FY15 and £0.6m in FY16.
Valuation: Cash-backed value and income
Safestyle’s share price is now trading in the middle of the range established at the beginning of Q414, having seen some weakness since the year-end IMS. Estimate revisions have little impact on valuation measures, which remain at modest levels (FY15 P/E 9.2x, prospective EV/EBITDA 5.7x, falling to 8.6x and 5.0x respectively for FY16). A healthy 8.9p expected FY14 dividend (a 5.6% yield, 1.8x covered) is expected to grow further. And a growing net cash position also provides management with financial flexibility to invest and/or distribute at some point in the future. Safestyle’s strong market and financial position in a UK consumer-focused sector offer prospects that are not fully reflected in its rating, in our view.
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