Liberum downgrades Safestyle after profit warning

Liberum cut its stance on AIM-listed windows and doors specialist Safestyle to ‘hold’ from ‘buy’ after it warned on 2018 revenue and profits on Wednesday, reducing the target price to 130p from 200p.

Safestyle cautioned earlier that revenues and underlying profit for 2018 will be "materially below" the previous year’s levels and current market expectations as the market continues to deteriorate. It also said that the activities of "an aggressive new market entrant" have added to an already competitive landscape and hit certain areas of the group’s operations.

Liberum said that while the valuation is supportive, the share price performance is likely to be subdued until investors feel that the full impact of the new entrant is understood, and that Safestyle's cost savings programme has been successfully implemented.

"We understand that the new entrant has had a significant impact on Safestyle because it has started activities in Safestyle's northern heartland, and we also understand that it has attracted some self-employed sales and canvass representatives from Safestyle," Liberum said.

The brokerage cut its sales estimate by 10% for 2018, which it said should prove quite cautious as around 40% of leads are generated by door canvass, where the disruption has been felt most. It expects gross margins to be broadly maintained, with the impact of the new entrant offsetting the benefits from cost rationalisation measures undertaken by Safestyle, and estimates a reduction in overheads due to management actions to rationalise the group.

Liberum pointed out that management has pledged to maintain the 2017 full-year dividend and said the shares should also be supported by £9m of free cash flow at the trough and around £11m of net cash expected at the end of 2018.

At 1300 GMT, the shares were down 22% to 118p.