Confidence improving with marketing spend increasing back to commercial levels
Safestyle UK (LON:SFE) is steadily getting back to where it was pre 2017. The management team has only been in place for a year but in that time has worked hard to stabilise the business and return it to profitability. Confidence of where the business is in the turnaround strategy is evidenced by the announcement today that it will significantly invest in marketing over the next three years. This will underpin an increase in the order book and drive profitability. Investment started in Q419 driving market share gain and an improved order book but has meant profitability is marginally below expectations, at (1.5m). Importantly revenue of £126.2m was broadly in line with ZC forecast (£128.7m) and the strong growth in the final weeks of Q4 suggest the run rate into Q1 of FY20 was good. The turnaround part of the strategy has been executed. The business is now in the recovery phase with the return to profitability in Q319 and the commitment to increase marketing spend to drive profitability over the next three years.
- FY19 shows material progress with market share and revenue returning strongly: Revenue of£126.2m is up 8.5% yoy and 10.7% in H219 relative to the last six months of FY18. Importantly today’s statement indicates that the run rate into FY20 was strong as the order book reacted to the increase in investment into lead generation and was up 24% yoy. The good revenue performance is reflected in improved market share of 8.4% at the end of September against the 7.0% in December 2018. This should have increased further in Q4 but remains well over 100bps below its peak. We maintain that Safestyle still has a significant competitive advantage against its peers, it will become increasingly apparent as the order book and revenue builds. In terms of profitability, the loss before tax of no more than £1.5m is an increase on the previous forecast of £0.7m but this relates to the investment made into marketing in the final months of the year.
- Looking forward the recovery will pick up pace: It should be stressed that the turnaround and recovery to date has been executed in what at best can be described as a lack lustre RMI market with the UK consumer reluctant to spend on big ticket items. Forecasts are not predicated a material change in the demand environment, but any improvement would likely lead to disproportionate improvement in profitability. Up dated FY20 forecasts on the back of today’s statement reduce PBT to £2.7m (full details of changes to forecast can be seen on page 2).
- Valuation: Based on last nights close the shares trade on a recovery FY20 P/E of 22.5x. Safestyle UK has entered stage three, the final stage of its recovery that will see profitability significantly improve.
