Safestyle UK “strength of recovery in demand materially ahead of expectations” says Zeus Capital

Safestyle UK plc (LON:SFE) interim results highlight the impact to the business from the nationwide lockdown that started in late March and began to ease in mid to late May. Within today’s results, the outlook statement is probably of most interest. The strong demand highlighted in the trading update in July has continued through August and into September. With the balance sheet in a strong position, post the fund raise, demand firmer than expected and national competitors struggling, Safestyle is in a good position. The recovery had been well underway until the COVID-19 lockdown interrupted operations but Safestyle has come through it in a position to capitalise on good market demand and weak competitors. Revenue numbers for FY20 increase marginally to c. £110.0m but profit forecasts are unchanged. The level of order intake has outstripped the short-term capacity to install orders leaving the order book 82% higher yoy, indicating that the run rate into FY21 should be positive in terms of forecasts.    

  • Order book outstripping deliverability: The UK private RMI market has seen a material uplift in demand since the easing of lockdown, much stronger than purely catch up. All areas of the building product space have reiterated the underlying strength over the last few weeks. Safestyle is capitalising more than most as it benefits from the additional structural challenges faced by its national competitors. The sales order intake is up 26.4% in the last three months, this shows an acceleration during August. Revenue increased 13.5% in July and August and this will be sustained during H2 resulting in double digit growth yoy. This leads to an upgrade in FY20 revenue of c. 3.0% to £110.0m. With the cost base increasing to meet operational requirements from the sustained levels of demand, profit estimates remain unchanged.    
  • Interim results show a strong start to the year and recovery from May onwards:  Revenue declined 34.7% in H1 with trading ahead yoy up until the 23rd of March when the UK went into lockdown. Gross profit declined 41.5% to £9.7m (HY19: £16.6m) as margin declined 271bps to 23.1%. This resulted in an underlying loss before tax of £5.1m (HY19: -£0.8m). However, it should be stressed that the loss during the 8/9 week lockdown period was c. £6.0m highlighting the improved performance of the business when compared against the same operating days yoy. Since the easing of restrictions trading has recovered strongly.
  • The improvement in revenue should see operational gearing drive earnings higher: The recovery of the business was being maintained during Jan and Feb with revenue up 3.4%, gross profit up 11.4% and the business generating a positive PBT of c. £1.0m against a loss in the previous year. The strength of the order book will see this continue during H2 and margin will begin to improve as the increase in costs to meet demand stabilises. This will underpin operational gearing and its impact on Safestyle UK earnings.
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