Safestyle UK reported their interim H1 results this morning, and if you have any interest in the company, then the reading was not positive. At all. Before I go into my analysis, of which there is plenty to go at, these are the main bullet points of the news you need to know.

The results

All bullet points compare H1 of 2018 to H1 of 2017:

  • Revenue: £60.5m compared to £82.5m – down 27%
  • Gross profit: £14.6m compared to £27.5m – down 47%
  • Gross margin %: 24.1% compared to 33.4% – down 930 basis points
  • Underlying EBITDA: (£2.5m) compared to £9.8m – down 125%
  • Non-recurring costs: (£2.8m)
  • Loss/Profit before tax: (£5.7m) compared to £8.8m – down 164%
  • EPS – Basic: (5.7p) compared to 8.3p – down 169%
  • Interim Dividend: 0p compared to 3.75p
  • Cash: £4.6m compared to £17.7m – down 74%

Brackets indicates a loss.

Those are the financials, these are the other important bits of info to know:

  • Extremely challenging first half with significant business disruption caused by an aggressive new market entrant
  • Volume of frames installed decreased by 28.7% to 99,491 (H1 2017: 139,612)
  • Average unit sales price up 2.9% to £616 (H1 2017: £599)
  • Average order value up 4.9% to £3,388 (H1 2017: £3,230)
  • Market share as measured by FENSA declined to 8.5% at 30 June 2018 (H1 2017: 10.8%)
  • Non-recurring costs of £2.8m (H1 2017: £nil), predominantly due to litigation costs and a Health and Safety Executive (“HSE”) fine
  • Board appointments during and post the period with a new executive team, Chairman and Non-executive Director
  • Litigation concluded in September, through an out of court settlement
  • A detailed three phase turnaround plan has been developed which has clearly-defined projects and milestones that are designed to stabilise the Group and then return it to profitability

You can read the interim results statement in full here

There’s no way to spin this, H1 of 2018 was a very had half of the year for the company. Here’s my analysis.

DGB People


Here is the comment provided by the company on these results:

There has been steady improvement in our daily order intake which is almost 12% higher for September to date than it was at the start of July.  However, this improvement in order intake through July to September has not flowed into revenue in the quarter as the improvement came too late to affect installation volumes.  This has resulted in a weaker third quarter performance.

Conversely, as we exit the third quarter, the opening order book will be higher than originally forecast and as that converts into revenue, the Board still expects that the Group will be generating modest operating profit in the fourth quarter of 2018.

As a result, the Group expects to report an Underlying Loss Before Tax1 for the full year in the region of £(6.5m).

The Group is implementing its turnaround plans and is making progress in recruitment, process improvement, efficiencies and various other margin-enhancing initiatives.  Notwithstanding an uncertain consumer environment, and while we do not anticipate an immediate recovery back to 2016 and 2017 levels of financial performance, the Board’s expectations of a return to profitability for the Financial Year 2019 remain unchanged.

Commenting on the results, Mike Gallacher, CEO said:

“The results announced today reflect an unprecedented set of circumstances faced in the first half of the year that created a number of significant challenges for the business..  The litigation we initiated against an aggressive new market entrant has now concluded in an out of court settlement; as a result we expect some recovery in the trading position of the company in the second half.

“The Board and the Executive Team, including a number of new and high calibre appointees, believe in the fundamental strength of the core business model.  We have developed a three phase turnaround plan which is designed to stabilise the Group before returning it to profitability and then accelerating growth.  The focus of the whole Group is now on delivering this plan quickly and effectively.”

This is a bad H1 for the company. Their previous guidance and profit warnings have of course pointed towards negative news, but the size of these declines were much steeper than I thought they would be.

The financial figures in the first set of bullet points are harsh. Profits have taken a serious hit, dropping 47%. Although average order values have risen 4.9%, market share has declined sharply from 10.8% to 8.5%. That is always going to have a big impact on the profitability of any company. It’s also worth nothing that the company will have spent a lot of money trying to stave off the fight from SafeGlaze and the recent litigation court case, which they saw a positive outcome.

A long list of market problems and other singular issues mean the company is likely to make a full year loss of £6.5m. For a company which now has less than 9% of market share, this is a large figure indeed. The number of installed frames in H1, now down to less than 100k only highlights that further.

Despite this raft of bad news, look at what happened to the share price:

Credit: Bloomberg

I was expecting a sharp drop in all honesty. But, my guess is that after this half investors think there can be no more bad news and that it might be a good time to buy the dip. In other words, buy shares whilst at their lows in the hope that the only way is up from here.

Of all the facts and figures above though, the two that remain stand outs for me are the decline in market share and the available cash. When a company loses market share in a big way, it becomes harder to re-build revenues and profit margins. Price rises to the home owner alone won’t help much. It is imperative that the company does what it can to claw back the market share it has lost. Margins are thin, it was the volume that was driving the growth of the business, but volume is drying up as well.

The lack of cash would be a concern of mine as well. They will have spent a lot of money in restructuring the company in recent months, as well as spending to ensure that the other established nationals and newcomers like SafeGlaze cause as little damage as possible. £4.6m in cash for the size of company that Safestyle is won’t go very far.

On the subject of SafeGlaze, their settled deal sees them re-brand the business. I do not expect the company to disappear from the sector. I suspect it won’t be that long before we see a revamped version of SafeGlaze enter the market, and I fully expect them to be as aggressive as they were before the litigation case. Whether you liked them or not, they were effective in disrupting the market and stealing business and market share away from their main competitors.

Tough times ahead for Safestyle. Lets see if the new board appointments can manage to turn the ship around.

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