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Safestyle warns on profits amid slow margin recovery

By Michele Maatouk

Date: Thursday 16 May 2019

Safestyle warns on profits amid slow margin recovery

(Sharecast News) - AIM-listed windows and doors retailer Safestyle warned on Thursday that full-year profit will be below current market expectations as margins have been slower to recover, while costs also weigh.
In an update on current trading ahead of its annual general meeting, the company said the second phase of its turnaround plan is now well underway as it looks to recover volumes and market share, restore its operational effectiveness, reduce costs and improve margins.

The company expects to grow revenue by around 10% versus the first half of 2018, accelerating towards 20% in the second of this year. It said while some elements of consumer demand appear soft, the market has seen 2.7% volume growth in the first four months of the year "and against this backdrop it is pleasing to see that we have grown at more than twice that rate".

Meanwhile, the first-half margin performance is expected to have improved by around 4.5% compared to 2H 2018, with the momentum set to continue for the rest of the year.

Safestyle said its cost base has grown significantly but the group is addressing this "robustly" and expects to deliver a material improvement in its operating margin versus 2018 based on actions already taken this year.

Nevertheless, margin improvement has been slower than expected due to higher lead generation costs and the pace of recovery in improving operational effectiveness. As a result, it now expects turnover to remain broadly in line with current market expectations and continues to forecast a small profit for the full year, although this will fall short of current market expectations.

Safestyle said also it continues to expect its net cash position to increase compared to last year's closing level of £0.3m.

Liberum downgraded its profit expectations on the back of the update.

"Although it is disappointing to downgrade profit before tax expectations for 2019E from £4.5m to £0.7m, we note that this estimate still anticipates a £9.1m profit swing from 2018 to 2019," the broker said.

"The shares still trade at only 4.6x peak earnings, demonstrating significant upside in recovery. We remain confident that a significant recovery in profits will come through in 2020E and 2021E and the shares look cheap on multiples of these years, for example we see the price-to-earnings ratio dropping from 12x to under 9x and a high free cash flow yield in those years too."

At 0955 BST, the shares were down 14% at 79.20p.

Last September, Bradford-based Safestyle settled its claims against rival SafeGlaze, which agreed to change its name and rebrand fully.

Safestyle had accused NIAMAC developments, trading as SafeGlaze, of trade mark infringement, passing off, misuse of confidential information, malicious falsehood and various other matters.

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