Zeus Capital FY19 forecasts were compiled in December 2018 and assumed that cost input pressures would abate, Epwin Group (LON:EPWN) would win market share and the underlying trading environment would remain solid. The first two assertions have proved correct but trading conditions in the second half of FY19 proved increasingly challenging for the sector. The extension of Brexit lead to an extenuated period of political uncertainty and a deteriorating macro-economic backdrop. Put in this context, a flat performance in profitability from Epwin is credible. Because of the trading back drop, ZC estimates are moved back in line with consensus. The rally in the shares since December is warranted on the much-improved level of gearing, attractive 5% yield and steadily improving outlook. Despite this appreciation the shares remain at a substantial discount to peers.
- Change to forecasts brings ZC in line with consensus: ZC Estimates had been at the upper end of consensus since they were introduced in December 2018. This positive view was based on the remedial action management has undertaken over the last couple of years and the mitigation of the cost input headwinds. Interim results in September continued to suggest deliverability of high-end consensus estimates, despite a tougher June. Since then we have had indications from the likes of Travis Perkins, Forterra, Tyman, Kingspan, Polypipe and others that conditions in the UK were more challenging in H2. As a result, we reduce operating profit by c. 6% to £18.8m (prev. £20.1m) with revenue cut c. 4% to £281.3m (Full changes to forecasts on page 2).
- Balance sheet conservative and the outlook is encouraging: The sale and leaseback of the Telford site in Q3 last year reduced net debt from 1.0x to a conservative 0.6x EBITDA. The only material change to cash forecasts is the timing change to tax payments in FY20 that will see a double payment of tax in the year, a legislative change that affects all businesses.
- Valuation: Epwin Group shares rallied strongly in the last four months of the year but even at the current valuation trade at a significant discount to peers, (c. 40%). The sector outlook has improved in terms of cost input pressures but, as seen in the last six months of 2019, the demand environment has weakened. However, house price and transaction data since the election could indicate a better RMI environment than we have had for some time. The shares trade on 10.0x PER and EV/EBITDA of 5.9x on FY20 forecasts with an above average yield of 5.0%.
