Kevin Wilde December 6, 2017

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.
Share: