Safestyle (AIM: SFE) has enjoyed a good run of trading over the last couple of years, gaining share in a decent market for home improvements. However today’s AGM statement struck a note of caution. 2017 is said to have started well but recent trading has been slower than expected with the latest industry data showing a significant contraction in the overall market.
Against a strong comparable period last year, order intake is ahead by 2 per cent over the first four months. However profits for the first half are now expected to be lower than those in 2016 due to lower than planned volumes and some double running costs as new production facilities come on stream. The second half should improve due to internal productivity initiatives, but overall the trading environment is ‘more challenging’. Nevertheless the board is confident of the full year being ‘broadly in line with market expectations’.
Brokers Liberum and Zeus have retained their earnings forecasts of 20.9p for this year. Safestyle increased prices in January and has continued to gain share, so its offering appears to remain competitive. There’s scope though to use the gross margin if volumes continue to disappoint and there’s also the promise of efficiency gains to come through. A key attraction of the stock is its cash generation and history of special dividends, with the shares currently yielding 4.1 per cent on a growing dividend. Broker Liberum also believes £30 million could be returned to shareholders in special dividends by 2020, which equates to an additional 12 per cent return.
The resilience of the UK consumer has been a pleasant surprise against the various headwinds we’ve faced: Brexit uncertainty, rising inflation, subdued wage growth, and devaluation. Apparel retailers have been struggling, but spending has held up in the main. However a more volatile period, especially where big-ticket discretionary purchases are concerned, wouldn’t be a surprise. That’s not a cue to get bearish, but adopting a more cautious approach to this theme makes sense.