Epwin Group plc (LON:EPWN) half year pre-close trading update six weeks ago led to a c. 20% increase in ZC FY21 profit expectations. Today’s interim results confirm that trading has remained strong and is on course to meet consensus FY21 expectations. Revenue is 13% ahead of FY19 with both divisions recovering strongly. Margin has come under pressure due to raw material cost input pressures and is down 70bps on the 6.7% achieved in H1 ’19. With supply chains remaining under pressure, it’s unlikely that we will see any meaningful pull back in raw material costs before next year. As a result, ZC estimates are left unchanged for the time being but still assume a material 25% increase in profitability as operational gearing and price rises increase the margin by 130bps. An interim dividend of 1.75p has been announced with the Company stating that it will split payments between the interim and final more evenly this year. The shares trade on 16.4x current year earnings falling to 12.4x in FY22, a material discount to the sector, and offer a prospective yield of 3% with the dividend growing in line with the recovery earnings underpinned by a strong balance sheet.
- The recovery from lockdown has seen a sharp increase in earnings but there is potentially significantly more to come: In H1 21, revenue is 13% ahead of that achieved in H1 19 at £157.8m. Since ZC estimates were reintroduced in September last year FY21 forecasts have been increased three times. This has taken revenue expectations from £239.7m to the current estimate of £312.1m. This shows 30% growth yoy but, more importantly, a 10.6% uplift on the £282.1m achieved in FY19. This factors in slower growth in H2 relative to H1. Profit forecasts have increased 65% since September with the current ZC estimate for FY21 of £12.9m. This remains below the FY19 level due to raw material prices, potentially offering further upgrades should operational gearing come through as supply chain issues ease. The balance sheet has been well managed and remains lowly leveraged with an estimated c £13.0m of net debt at year end.
- The pressure on the global supply chain is having an extended impact across the building product industry: The shutdown of the economy in Q1 last year followed by exceptionally high levels of demand has exerted unprecedented pressure on the supply chain, this has been exacerbated by one off events during 2021. Initial expectations had been that pressure would ease in the final weeks of the year but, with demand remaining at elevated levels and the impact from additional issues facing petrochemical supply, it now looks as if raw material prices will remain high well into FY22. This potentially means FY22 could see margin recovery at a quicker rate than current estimates imply, should raw material prices ease at the same time as the full impact of surcharges and price increases are felt.
- Valuation: Epwin Group is trading on 16.4x FY21 earnings, in line with mid cap peers. Looking at FY22 multiples, that discount normalised trading, the shares are at a c.25% discount. The gap will close should operational gearing and price rises drive faster than expected earnings growth. A similar margin to FY19 would drive double digit uplift to FY22 profitability. Investors can look forward to a c. 3.0% yield in FY21 with the potential for it to grow as earnings recover. In the current year, the dividend it will be more evenly split between H1 and H2in recognition of the cancelled final in FY19 and the interim in HY20.
