Safestyle UK PLC (LSE:SFE)
- Safestyle has the #1 position in the UK replacement window and doors segment.
- The company has a simple, proven business model that has seen them grow market share for 12 consecutive years (up from 4.1% in 2005 to 11.2% in 1H2017).
- Safestyle has a Fort Knox balance sheet with net cash position of 17MM GBP.
- The business is highly cash-generative with negative working capital. Long-term median returns on tangible capital are greater than 200%.
- An increasingly regulated market suits larger business’ that have the infrastructure to operate within the regulations.
- Fragmented market + structural competitive advantages + superior proposition = sustainable market share gains + opportunities for margin enhancement.
- Market should grow at long-term nominal GDP of 3-4%, but through market share gains, Safestyle should grow revenues at >4% and earnings at >6% per annum over the next cycle.
- Long-time CEO with skin in the game and history of good execution.
- Historical P50 P/E of 15 and P50 EV/EBIT of 11.7 for a company with net cash, very good profitability, and good growth seem very conservative, but the current P/E of 10.9 and EV/EBIT of 7.8 seems way too cheap.
- 5-year annualized return of 19 to 24% seems possible (9-10% FCF yield + 4-6% earnings growth + 6-8% multiple expansion).
- The main risk is an economic slowdown in the UK that sees a reduction in renovation, maintenance, & improvement (RMI) spending. There are already signs of this occurring in the segment; however, Safestyle has historically taken market share in tough market conditions and is well placed to do so again.
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