Epwin Group plc (LON:EPWN) trading update in today’s AGM statement indicates that the business remains on course to meet FY17 expectations. FY16 results (April 6th) met expectations despite difficult end markets, operational issues in the fabrication division and increased cost pressures stemming from the devaluation of Sterling post the Brexit referendum. Since the results, anecdotal indications suggest that the important RMI market has remained broadly flat yoy. The change to forecasts made in April discount the current operating environment and we leave forecasts unchanged on the back of today’s statement. Epwin continues to offer long term value with the shares trading on 8.2x FY17 earnings and 5.4x EV/EBITDA. The yield remains a very attractive 5.8%, well covered by both earnings and free cash flow.
* Market conditions reflected in forecasts – Management takes a conservative approach to forecast guidance reflected in the fact that underlying results have surprised on the upside with acquisitions adding a material improvement in profitability since the IPO. Actual FY16 PBT was c. 25% ahead of the original ZC forecast at the time of initiation in September 2014. This has been despite difficult market conditions. Only New Build (c.20% of revenue) has shown sustained growth across the period with the RMI market (c. 70% of revenue) broadly flat and Social Housing (c.10% of revenue) seeing a material decline (17% in 2016). The small downgrade in April 2017 was reflective of the change in operating conditions and needs to be put in the context of larger downgrades elsewhere in the building products sector. Despite the cut to Epwin’s forecasts, both Revenue and EBITDA will show c. 3% growth in FY17.
* Operational improvements and acquisitions to drive growth – Operational issues experienced in Epwin’s fabrication division continued during 2016. This offers an opportunity moving forward. FY16 operating margin in the business was 2.6% and feasibly a level of c. 5% should be sustainable. This could add c. 10% to underlying operating profit. The balance sheet remains lowly geared with just c.£18.0m of net debt (0.5x EBITDA) falling to c.£7.0m in FY18. Assuming 1.5x gearing in FY18 would provide over £40m of capital for acquisitions before any contribution from the acquired businesses. The three deals completed since IPO have all been in line with strategy having added additional products and cross selling opportunities as well as having the benefit of being earnings accretive.
* Zeus Valuation – Epwin Group plc shares trade on a current year PER of 8.2x, a significant discount to peers, and yield 5.8%. Forecast growth reflects the current unfavorable operating environment and is discounted in the rating. The shares will rerate as the cash generative and resilient nature of the business through the cycle becomes increasingly appreciated.
