Epwin Group Plc (LON: EPWN), the low maintenance building products manufacturer, supplying businesses in the Repair, Maintenance and Improvement (“RMI”), new build and social housing sectors, announced today its half year results for the six months to 30 June 2017.
Financial highlights
| £m | |||
| H1 2017 | H1 2016 | Change | |
| Revenue | 149.9 | 143.3 | 4.60% |
| Underlying operating profit 1 | 11.1 | 11.8 | -5.90% |
| Underlying operating profit margin | 7.40% | 8.20% | -80bps |
| Profit before tax | 7.5 | 10.4 | -27.90% |
| Basic EPS | 4.36p | 6.08p | -28.30% |
| Dividend per share | 2.23p | 2.20p | 1.40% |
| Net debt | -28.2 | -29.9 | |
| Operating cash conversion 2 | 75.70% | 79.70% |
(1) Underlying operating profit is operating profit before non-underlying items as defined in note 3.
(2) Operating cash conversion is pre-tax operating cash flow as a percentage of underlying operating profit.
Highlights
· Sound performance in challenging market conditions
· Continued top line growth in Extrusion and Moulding
· Significant input cost pressure on materials due to the weakening of sterling
· Will take time to pass on cost increases in current market conditions
· Continuing programme of consolidating production facilities and refining operating footprint
· Strong sales of award-winning Optima window profile system
· Continued investment in new products and materials
· Challenges with two largest customers, as notified on 16 August 2017. £3.9 million exceptional bad debt provided in respect of Entu (UK) plc administration
· Net debt of £28.2 million, less than 1x EBITDA and cash conversion remains strong at 75.7%
· Increase in dividend reflecting confidence in long-term outlook
Current trading
Group strategy and market conditions:
· Continue to make progress with our strategy, focussed on operational improvement, broadening the product portfolio, selective acquisitions, cross selling and market share growth in key sectors.
· Financial position remains strong, with net debt at the half year less than 1x EBITDA and with significant funding headroom to continue to invest in the business.
· Our key RMI market remains subdued, the newbuild market continues to be strong and there are indications of improved demand in the social housing market.
· As noted above, significant input cost inflation has been experienced which is a challenge to pass on immediately in a subdued and changing market.
· Against this market background, the Group had already commenced a programme of site consolidations to adjust its cost base and further improve the efficiency of operations and this is continuing, with the Board expecting circa £2.5 million of exceptional cash restructuring costs in the current financial year.
Issues affecting two of its customers, each accounting for around 5% of the Group’s revenue, as reported in the recent trading updates:
· Entu (UK) plc (“Entu”), reported significant funding issues whilst the other has sold its plastic distribution business, which is principally supplied by Epwin, to a competitor of Epwin. Entu has since appointed administrators who sold the trade and assets to a new entity which has indicated their intention to continue trading and invest in the business. Epwin is currently supplying product on a cash basis to this entity and discussions on any future trading relationship are ongoing.
· The position in respect of the other customer has yet to be fully clarified.
· As a result of these two issues the Board expects the full year financial performance to 31 December 2017 to be slightly below current market expectations.
· The Board also now expects the financial performance of the Group in the financial year to 31 December 2018 to be lower than the market expectation for the current financial year.
Jon Bednall, Epwin Group Plc Chief Executive Officer, said:“Performance in the first half of 2017, despite the significant input price increases resulting from the weakening of sterling, demonstrates the resilience of the Group’s business model and the Board’s strategy.
We have continued to broaden our product portfolio and channels to market as well as drive operational efficiency and product development. However, in light of market conditions, the political and economic uncertainty and the highlighted customer issues, the Group has accelerated the implementation of a programme aimed at adjusting the Group’s operational footprint.
We remain confident of the long-term growth drivers in the RMI market and continue to progress with our strategy, focused on operational improvement, selective acquisitions, product range expansion and development, and integration of operations. We are confident in continuing our record of strong cash generation and our ability to offer an attractive dividend to shareholders.”
Zeus Capital Comments:
Interims in line; visibility on customer impact increasing
The Interim results had been well flagged in the pre-close trading update (16thAugust) but importantly today’s announcement provides detail with regards the issues with the two largest customers. Both situations are on-going but developments, particularly with entu, offer the opportunity to assess the likely impact in more detail. This leads to cuts in pre-tax profit of c.7%, c.19% and c.13% in FY17, FY18 and FY19, respectively. New forecasts are a best estimate of the potential impact and ZC feel this is a robust and realistic assessment of the situation. A better outcome might be forthcoming should entu trade well under new ownership and the impact from the new owner of SIG’s distribution network is less than expected. Valuation post today’s downgrade is 5.9x FY17 earnings increasing to 6.7x in FY18, the trough year for earnings. The shares yield 9.1% with free cash flow cover of 1.1x in the current year increasing to 1.5x in FY18.
Scale of customer risk beginning to be quantified – Today’s statement provides more information with regards the potential fallout from the issues with Epwin’s two largest customers. FY18 sees the material impact and should be viewed as a transitional year before a solid recovery in profitability in FY19, predicated on cost savings. In FY18 we cut revenue by 8% to £279.1m (prev. £303.8m) leading to a 19% cut to profit before tax. This assumes the benefit from additional restructuring due to the potential loss of volume does not start coming through until FY19. Despite the difficult trading environment, the interim dividend increases by 1.4%. The FY17 assumption is pared back to 1.5% growth followed by 1% in both FY19 and FY20, previously 3% growth had been assumed in each year.
Cashflow remains strong – After today’s cut to forecasts Epwin will generate c. £10.0m of free cash flow increasing to £14.0m in FY19. This is against cash dividend payments, on the new lowered growth, of c. £9.5m offering 1.1x to 1.5x cover in both years. With estimated finance costs of c.£1.0m the cash generation provides confidence in the financial strength of the business.
Results and current trading – Revenue growth of 4.6% was underpinned by the National Plastics acquisition last year. Organically, the higher margin extrusion business saw small growth. We estimate that the Fabrication division was marginally down yoy. Management had alluded to cost pressures, particularly in resin and hardware, acting as a headwind to profitability earlier in the year and this has manifested itself in operating margins declining 80bps to 7.4%. The operating environment remains difficult and competitive making it difficult to attain price increases to offset cost input pressures.
Valuation – The shares look to be discounting a great deal of the customer risk having declined to 72.75p since the initial announcement. Trading on 5.9x FY18 earnings and yielding 9%.
