Window and door replacement company Safestyle UK (SFE:AIM) offers a play on rising home improvement spend and represents a good portfolio fit for growth and income investors. Winning share in a recovering and fragmented market, the £138.4 million cap’s annual meeting update (21 May) could help frame a positive narrative around the stock.

Safestyle UK is the number one retailer and manufacturer of PVCu replacement windows and doors to the domestic homeowner market. Competitive strengths include a sharp focus on the resilient homeowner replacement market, A-rated energy efficient products that make financial and aesthetic sense for homeowners, cheaper prices than national rivals and an advantage over sole traders on financing options and service.

Finals (26 Mar) for calendar 2014 showed a 9% sales rise to £136 million, while the robustly cash-generative company closed the year with £8.5 million net cash in the coffers. Safestyle UK’s share of the fragmented replacement window and door market grew from 7.85% to 8.48%, a tenth consecutive year of market share growth in succession.

Shares believes Safestyle UK will continue to benefit from ongoing recovery in the wider economy and RMI (repair maintenance & improvement) market. Pent-up demand for replacement windows is building, while pensions reform should generate a home improvement spending boost.

Safestyle UK is also making inroads into the south of England, where average sales prices are higher and brand awareness is building. A shift from door-to-door canvassing to lower cost digital marketing is enhancing margins, while TV advertising is improving national brand awareness. In an exciting adjacent move, Safestyle has also entered the conservatory refurbishment market; similarly fragmented with few national players and leaving significant growth for Safestyle UK to target.

Cantor Fitzgerald has initiated with a ‘buy’ rating and 220p price target, arguing Safestyle UK is cheap across key metrics. For 2015, the broker forecasts 10% pre-tax profit growth to £18.1 million for earnings of 18.2p (2014: 16.5p), conservative-looking given healthy orders seen in the opening 11 weeks of 2015 and upside from the conservatory refurbishment launch.

A £19.3 million pre-tax haul for 19.7p of earnings is expected for 2016. Based on this year’s 10.1p dividend estimate, Safestyle UK offers a prospective 5.5% yield, though given its free cash-flow generation, there’s scope for an even more generous payout and also potential for special dividends.

At 185p, Safestyle trades on 10.2 times forecast earnings, a valuation suggesting re-rating scope, while a 5.5% yield should tempt yield-hunters.

SWOT ANALYSIS

STRENGTHS

• Sharp homeowner replacement focus

• Robust cash generation

• Strong balance sheet

WEAKNESSES

• Operates in heavily regulated sector

• Housing market exposure

• Potential for bad debts

OPPORTUNITIES

• Grow window replacement market share

• Build conservatory refurbishment business

• Enhance national brand awareness

THREATS

• Heightened competition from Anglian and Everest

• Softening of RMI market

• Rising glass prices