Epwin Group: Making Progress In Soft Markets

Epwin Group: Making Progress In Soft Markets

Epwin’s (LON:EPWN) H119 update reiterated existing guidance. Markets remain soft but business improvement activities, including new facility and product development investment, are ongoing and should be reflected in earnings improvement. The company remains conservatively funded and in a good position to continue to develop. An excellent dividend yield and modest rating at an earnings low represent good entry points for investors.

Progress in tough markets

H119 revenue was marginally ahead y-o-y on a like-for-like basis (ie ex Amicus and PVS acquisitions, Cardiff site closure and discontinued glass operations). This is likely to reflect some pricing improvement and, implicitly, volume softness, in our view. Given previous restructuring actions, progress from window systems (we expect, including weak competitor effects) and acquisitions, H119 EBIT should exceed its prior year equivalent (this was originally reported as GBP7.1m, like for like; likely to be slightly higher stripping out the exited glass business). Interim gains would support our assertion that despite still weak UK markets, FY18 represented the trough earnings year for Epwin. At the end of H119, net debt to EBITDA is understood to have been c 1x, slightly above the year-end position after the c GBP3m acquisition consideration is paid.

New facility investment and banking re-set

A site purchase, construction and lease agreement for a new warehouse and finishing facility at Telford has been signed, which will consolidate four other small facilities nearer to existing extrusion and fabrication operations. In financial terms, this yields a one-off GBP8m cash benefit for Epwin, which we expect to be received prior to the year-end. This is now in our model; there is no FY19 P&L effect and we will adjust as necessary (ie interest benefit, lease costs) for future years when H119 results are announced. Epwin has also re-set its banking arrangements with an enlarged RCF of GBP65m (previously c GBP60m spread across an RCF, term loan and accordion) and an overdraft facility of GBP10m (previously GBP5m) to 2022. This happened earlier than strictly required but simplifies Epwin’s financing structure.

Valuation: Value and income attractions

Epwin’s share price is back to levels seen at the beginning of the year following a c 13% decline since the beginning of June. (In contrast the FTSE All Share Index is up c 9% ytd.) As a result, the FY19 P/E of 7.3x and prospective dividend yield of 6.8% should appeal to value and income-focused investors alike. We acknowledge soft and uncertain markets but internal actions are driving our expectations of progress.

Business description

Epwin Group supplies functional low-maintenance exterior building products (including windows, doors, roofline and rainwater goods) into a number of UK market segments and is a modest exporter. It has a vertically integrated model in windows and doors and a leading market position in roofline products.