Safestyle UK: Never make decisions based only on quantitative measures

Oscar Lara Rapp (@oscar_l_r)

Today I want to talk about a very good lesson that all investors should learn from: Safestyle. This company is a retailer and manufacturer of PVCu windows and doors in the UK homeowner replacement sector. The company was founded in 1992 by Mitu Misra and in 2013 started floating in the Alternative Investment Market.


How has it performed? Let's take a look at some business indicators:

All these figures show that the business had a very good health, at least until 2016. For example, sales were increasing 10 % annually and operating profit was growing 20 % annually. Thus, the company was not only selling more, but it was doing it in a more efficient way. This can also be observed in the ROCE values, which reach 40 % in 2016. At the same time, Safestyle was also making a very good amount of Free Cash Flow for its shareholders. And, of course, no debt.


From all these numbers, we can have the feeling that this is a company which may have a relevant moat or competitive advantage. At PER 14 we could even say that it was a good opportunity. Not expensive for these great numbers.


Now, let me ask a question: would you have invested in this company? Think about it for a while, please.


Now, look at the this graph:

The green line is the moment when you made the decision (publication of the annual report of 2016) and the blue line is what happens shortly after 2017 figures were released: the stock drops by 90 %!.

If we looked at 2017 results without comparing them to the previous years, they would still be pretty interesting. However, when compared with the previous years, we know that something important is happening in the business. And it is happening very fast. Revenue has slightly decreased, but operating profit and EPS are around 30 % below the results of 2016. Indeed, the negative trend continues in the first half of 2018, when Safestyle is reporting a loss of 5.7p vs an income of 8.3p in the same period of 2017.


But... what has exactly happened? How can a company which showed these incredible numbers in 2016 be suffering so much just one year later? Short answer: a new competitor has shown up in the market and it is seriously hurting Safestyle. But why is it hurting so much and so fast? This cannot be just a normal competitor and it requires a longer answer. Even worse, how could an investor of Safestyle in 2016 have known that something like this could come? Looking at the numbers reported at the end of 2016, most investors would have said that this company had a very strong moat. Can't we trust numbers anymore?


Let's come back to the beginning of this story. As I have explained, Mitu Misra founded this company in 1992, which started floating in the Alternative Investment Market in 2013. At that time something very important happened: Mitu Misra left the business. Isn't it very strange that, when your business starts floating, you decide to leave? This is exactly the information which should have alarmed all investors.


Let's research a little bit more about the management of the company. For example, the Sunday Mirror warned in 2003 about Safestyle's sales representatives' techniques, remarking that "it is almost a badge of honor to rip off a customer". In March 2007 the company was condemned by the Advertising Standards Authority due to a misleading Safestyle advertisement. In 2008, a consumer right charity called "Which?" said that Safestyle followed questionable sales techniques. In 2011, Safestyle was the first company condemned by the Consumer Protection from Unfair Trading Regulations 2008. This is telling us that, even before the company started floating in 2013, there were still some important aspects in the company to be well researched by a potential investor.


However, this does not explain yet what happened with this new competitor. Who is it and how has it appeared? Well, the name of the new competitor is Safeglaze. Wait a moment! This name is very similar to Safestyle... Even more strange is the fact that this company has a registered office which is just half a mile away from Safestyle’s headquarter. The name of the owner of this new company? Mitu Misra! That's right, the old owner of Safestyle, the one who left his company as soon as it started trading. Now, he has come back starting up a new company for competing against its old company! Not only competing, but he is also trying to dismantle it from the outside, taking people from Safestyle board to his board in Safeglaze, as well as lots of workers who have also decided to move to this new company. In the meantime, Safestyle is trying to defend in the court what it is loosing in the market. Nobody can tell how this will end.


Now let me ask the question again: how could an investor in 2016 have felt that something was not working smoothly in Safestyle? Researching the management of the company! Not only the current one, but also the previous one. This would have been the key point for detecting that, for years, there were strange events happening in the company.


Takeaway: Quantitative evaluations of the business are not enough. Always perform qualitative analysis and, as Warren Buffet says, never forget about management!

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