Safestyle Uk Plc (LON:SFE) has announced a trading statement ahead of its Annual General Meeting to be held today. Top-line sales continue to recover and the orderbook is rebuilding following a period of significant operational disruption during FY18. However, a slower than anticipated recovery in profitability means FY19 earnings guidance moves lower. Beyond this, we take encouragement from the momentum seen in the Group’s order book, management’s commitment to the clearly defined turnaround plan, and the ‘cautious optimism’ for a step up in profitability in FY20, leaving our FY20 forecasts unchanged.
Top-line sales rebuilding: The first four months of FY19 has seen a good ongoing recovery in the Group’s top line performance, with the order book rebuilding. Revenue is expected to be up c.10% YOY in H1, accelerating towards c.20% in the second half as Safestyle annualises softer prior year comparatives. This increase in sales is comfortably ahead of the 2.7% growth seen in the wider market (as measured by FENSA) with Safestyle growing at more than twice that rate and regaining market share.
Profitability: Progress has been made in recovering the Group’s gross margin, up 4.5% versus H2 2018, with this momentum expected to continue through FY19. Robust action is also being taken to address the inflated cost base of the business and is expected to result in a ‘material improvement’ in operating margin YOY. Despite this, the pace of recovery has been slower than anticipated, resulting in lower than expected profitability in the current year.
Turnaround plan: Phase 2 of the Group’s turnaround plan, aimed at recovering volumes and market share as well as operational effectiveness remains ongoing and is expected to complete toward the end of FY19. Phase 3 will build on the full benefits of implemented changes to accelerate growth.
Forecasts: We have revised our forecasts to reflect today’s updated guidance. Our revenue assumptions are unchanged, reflecting the 10% YOY growth in business seen in H1. We move our FY19 profitability lower, reflecting slower than projected gross margin recovery due to ongoing investment in lead generation, and the pace of recovery in operational efficiencies. We leave our FY20 forecasts unchanged, reflecting management’s ‘cautious optimism’ for a step-up in profitability in FY20.
Valuation: At last nights close, the share traded on an FY19 PE of 103.3x falling to 11.8x in FY20, reflecting the Group’s ongoing recovery. Management’s confidence in its turnaround plan, and expectation of a step-change in profitability in FY20 underpin our investment case. The Group remains cash generative with forecast net cash of £1.3m at the end of FY19.
