Safestyle has now released its final results for the year ended 2015.
Revenues increased by £12.9M when compared to last year with the conservatories contributing £900K, and after an £8.1M decline in the cost of sales, the gross profit was up by £4.8M. Depreciation was up £50K, amortisation increased by £36K and share-based payments grew by £80K so that after a £3.5M increase in other operating expenses, with £1.7M of that increase due to more investment in TV and online advertising (this 18% increase in marketing costs resulted in a 32% increase in the value of orders generated), the operating profit grew by £1.1M. There was a reduction in finance costs but this was offset by a modest growth in taxation to give a profit for the year of £14M, a growth of £1.1M year on year.
When compared to the end point of last year, total assets grew by £10M driven by an £8M increase in cash, a £901K growth in deferred tax assets, a £544K increase in receivables and a £339K growth in property, plant and equipment. Total liabilities declined during the year as a £157K growth in current tax liabilities was more than offset by a £158K fall in payables, a £142K decrease in provisions and a £109K decline in finance lease obligations. The end result is a net tangible asset level of £16.1M, an increase of £10.1M year on year.
Before movements in working capital, cash profits increased by £1.2M to £18.9M. There was a modest cash outflow from working capital, mainly due to a growth in receivables, but the outflow was less than last year and after a £360K fall in tax paid, the net cash from operations came in at £14.6M, a growth of £2.9M year on year. The group spent £1.3M on property, plant and equipment along with £243K on intangible assets to give an impressive free cash flow of £13.1M. Out of this the group paid £7.5M in dividends and after a receipt of £2.5M relating to the proceeds from the warrants exercised by Zeus, there was a cash flow of £8M and a cash level of £16.5M at the year-end.
As expected, after a slower first half in terms of profit growth, the group delivered significant growth in the second half due to the fact that there was a further refinement to their advertising and online strategies and they launched their conservatory refurbishment programme. In the second half, revenue was up 12% and pre-tax profits increased by 13% in a market that contracted by 6.6% in the year which meant that over the year as a whole, the group increased its market share from 8.48% to 9.46%.
During the year the group carried out 60,134 installations, up 4.4% on last year consisting of 279,453 window and door frames, up 4.3%. The average frame sales price increased by 5.4% to £531 and the average installed order value increased from £2,806 to £2,963. They continued to expand their sales branch network in the South of England with new branch openings in Watford in February 2015 and in Guildford in January 2016. In addition, they opened branches in Newcastle and Stockport in the rest of the country. During 2016 they will seek to expand their sales branch network by identifying locations in which they are relatively under-represented in relation to the target customer base. They added an installation depot in Stevenage in Q4 and now have 12 depots.
Leads generated from digital activities and direct response channels accounted for 37% of all business during the year, a significant increase on the 31% in 2014. Lead generation from door canvassing remains an important part of the marketing mix, however, with the value of business from this source remaining constant during the year, although it reduced to under 50% as a proportion of the total. The group’s continuing increased investment in direct and digital marketing will be a key factor in gaining market share and reducing average lead generation costs going forward.
From the start of July, the group have enhanced their consumer finance offer which resulted in a significant step up in order intake and has been a key driver of sales during the year. This reflects their strategy of using finance to generate incremental business and has resulted in the elimination of all products that had previously earned the group introductory commission. This growth came with additional subsidy costs which they have sought to recover with an increase in their prices from January 2016. Early indications are that despite this price increase, they expect to maintain their market leading price and value proposition.
During the year the group invested in a new machining and cutting centre at their manufacturing facility. This year the board have approved the development of further manufacturing space and an additional glass furnace adjacent to the existing freehold facilities in South Yorkshire.
The group owns the adjoining site, on which they have planning permission to construct a 5,750 square metre factory extension. On completion, this factory will house a new glass toughening furnace, replacing the current furnace which is twelve years old, and the glass manufacturing process. This will bring the manufacturing of both the frames and double glazed units to a single site which will reduce handling costs and increase efficiency.
The remaining increased manufacturing area in the new factory will allow them to extend and optimise their manufacturing operations, improve product quality and provide sufficient capacity for the foreseeable future. Once vacated it is intended to use the current glass manufacturing factory for the manufacture of non-standard and specialist bought in items. They expect to increase their production capacity by up to 50% when fully operational and by up to 100% once they have utilised all available space. They have committed up to £7.25M for this project with expenditure starting in Q2 2016 and the facilities operational by Q3 2017. The investment will be funded from current cash resources.
In April the group launched their conservatory upgrade product to an initial eight sales branches. Following that, they rolled out the product to all branches. Order intake in the second half of the year and in the first two months of 2016 has continued to gain momentum and suggests that the target number of 450 installed conservatory upgrades will be comfortably met. At the beginning of 2016 they launched their Heritage range of PVCu windows and doors which are intended to reproduce the authentic look of traditional timber, along with their Inspire aluminium bi-folding doors. In Spring 2016, they will launch three new coloured PVCu frames to enhance their product offering.
During the year, nearly 2.4M shares were issued on the exercise of warrants granted to Zeus Capital in lieu of flotation fees, at an exercise price of £1 per share, settled in cash and this represents the whole total of outstanding warrants. There are also a large number of options outstanding. The only vesting conditions of the LTIP 2013 scheme are that the individual must remain an employee of the group for a minimum period. The LTIP 2015 scheme requires a combination of specific performance based criteria and remaining an employee for a minimum period. There are 4,083,333 options outstanding at an average exercise price of £1 attached to the 2013 scheme and 595,866 were granted at £1.79 under the LTIP 215 scheme.
In the current year so far, order intake has been very strong, significantly ahead of the same period in 2015, giving the board confidence that they will maintain their good performance in the year ahead when they are expecting to deliver market outperformance, gain market share and grow in absolute terms. In addition, thy have established a solid foundation following their entry into the conservatory refurbishment market and expect growth in this area to accelerate in 2016.
At the year-end, the group had a net cash position of £16.5M, an increase of £8M over the year. At the current share price the shares have a PE ratio of 15.9 which falls to 14 on next year’s consensus forecast. After the announcement of a special dividend, the shares are now yielding 6.2% which falls to 4% on next year’s forecast, not including and special dividends.
Overall then, this has been a good year for the group. Profits increased, net assets grew and the operating cash flow also increased, generating lots of free cash. Profits improved in H2 due to increased marketing, more conservatory refurb sales and the new consumer finance offering. The group have introduced a price increase for 2016 so hopefully that will take hold OK. There are now no warrants outstanding but there do seem to be a lot of options which could increase the share based payments charge going forward.
The group is embarking on a big capex drive with the new factory so there are obviously risks associated with that but in the long term this should be a positive. There is a large amount of net cash to pay for the investment, so there should be no need for a lot of debt or dilutive placing to pay for it. Going forward, 2016 has started strongly with an increase in order intake and with a forward PE of 14 and normal yield of 4% with a special dividend on top, I am very happy to continue holding here.
On the 22nd April the group announced that CEO Steve Birmingham and CFO Mike Robinson exercised options over nearly 4M new shares. These were granted at IPO with an exercise price of £1 a share and became exercisable on the second anniversary of the data of grant. Steve received 275,282 new shares and Mike received 625,470 and both of them sold about half of them. This is obviously going to cause quite a bit of dilution but these options have been known about since the IPO and are not new. Indeed, it is quite heartening to see both directors opting to retain about half of the shares granted.
On the 19th May the group released an update covering the first four months of the year. The year has begun very well and order intake over the period shows growth of 24% against the same period of the prior year, which is ahead of management expectations. Their strong start to the year can be attributed to a number of factors, including a wider product range, investment in the brand and the continued success of the promotional finance.
The comparators for the second half of the year will take into account the group’s enhanced promotional finance offer that was introduced in June 2015 and had a significant positive impact on trading in the second half. As a consequence the growth in order intake in H2 is expected to moderate from the current exceptional levels. Nonetheless, this is a good performance and I am very happy to continue holding here.
On the 18th July the group announced that Peter Richardson will join the board as a non-executive director. He was COO at Dyson for nearly fifteen years and is currently CEO of FlowGroup.
On the 19th July the group released an update covering the first half of the year. Since the last trading update they have continued to trade in line with their expectations. Order intake in the first half was up nearly 20% on the prior year, which is expected to deliver revenue of £83.5M, an increase of 12.8% which represents an increased market share from 9.5% to 10%.
During the first half of the year the order book increased significantly and they will benefit from a controlled release of some of this increase in the second half. Cash flow has continued to be strong and there was net cash of £23.6M at the period-end compared to £14.9M at the same point of last year.
Whilst the longer term impact of the Brexit vote on the broader economy remains to be seen, there has been no short term detrimental effect on order intake. As a result the board remains confident in their ability to continue to outperform the market and achieve full year results in line with management expectations. This all seems very positive to me. I must admit I wobbled after the Brexit vote on this share, grabbing some profit but this has reassured me enough to buy back in.