Epwin_Group (EPWN)

Acquisition extends product range

Epwin Group 4 November 2015 Update

Epwin Group

Acquisition extends product range

Acquisition

Construction & materials

4 November 2015

Price

126.00p

Market cap

£170m

Net debt (£m) at end June 2015

2.2

Shares in issue – current
(pro forma 136.2m)

135.0m

Free float

70%

Code

EPWN

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(9.4)

(11.9)

16.7

Rel (local)

(12.6)

(8.1)

16.0

52-week high/low

147.00p

84.00p

Business description

Epwin supplies functional low-maintenance exterior PVC 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.

Next event

FY15 year end

December 2015

Analysts

Toby Thorrington

+44 (0)20 3077 5721

Roger Johnston

+44 (0)20 3077 5722

Epwin Group is a research client of Edison Investment Research Limited

Vannplastic is Epwin’s first acquisition since listing in July 2014. It adds complementary product and materials technology to the group’s portfolio on a c 5x EBITDA entry multiple (£5.2m initial consideration). Its trading update indicates that underlying group profitability is in line with our existing estimates and the acquisition enhances EPS by 2-3% in a full year.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/13

255.3

14.5

10.1

0.0

12.5

N/A

12/14

259.5

18.0

11.2

4.2

11.3

3.3

12/15e

258.2

19.3

11.6

6.4

10.9

5.1

12/16e

270.5

20.8

12.3

6.6

10.2

5.2

Note: *PBT and EPS are normalised, excluding intangible amortisation and exceptionals.

Ecodek products broaden range offering

Epwin has acquired the manufacturer of Ecodek, which is a range of decking and balcony products made predominantly using recycled hardwood fibres and HDPE via an extrusion process. These wood plastic composite products are mainly sold into new build and social housing sectors, and also address other project demand. The Wrexham-based company was founded in 2002 and moved into a new 38,000sq ft factory facility at the end of 2012, which is currently in the process of adding a fifth extrusion line. Management will be staying on with the business. Epwin expects to introduce Ecodek lines into its own distribution offering and, by sharing extrusion expertise, be able to develop new products in due course.

EPS enhancing by 2-3% in a full year

Consideration for Vannplastic comprises an initial £5.2m (70% in cash, 30% in new Epwin shares, 1,161,817 shares at 133.7p) with up to £3.3m additional deferred (cash and shares in the same proportion) depending on financial performance in FY16. In FY14, the company reported revenue and EBIT of £4.1m and £0.6m respectively (a 14.6% margin). The purchase multiple is based on 5x EBITDA, inferring c £1m EBITDA generation in FY15 with a material uplift required to achieve the maximum FY16 earnout. We assume no contribution to Epwin earnings in the current year followed by PBT uplifts of £0.65m in FY16 and £0.75m in FY17. At the EPS level, this is equivalent to c 2-3% earnings enhancement in those years. There is no change to underlying estimates as Epwin has also announced that profitability is in line with market expectations for the existing group.

Valuation: Multiple attractions

Investor sentiment appears to have cooled on UK RMI plays in recent months. In Epwin’s case, earnings upgrades combined with some share price easing have enhanced its valuation attraction. The FY16e P/E at 10.2x is now c 1 point lower than a month ago, while EV/EBITDA for the same year is now 5.8x. At the same time, the prospective dividend yield for FY15 is c 5% with scope for growth thereafter. Epwin’s balance sheet funding remains conservative – we expect it to be modestly cash-positive at the end of FY15 – and it is in a position to make further bolt-on deals if opportunities arise.

Exhibit 1: Financial summary

£m's

2012

2013

2014

2015e

2016e

2017e

December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

Restated

 

 

 

 

Revenue

 

 

294.4

255.3

259.5

258.2

270.5

280.3

Cost of Sales

 

 

(209.9)

(185.8)

(186.7)

(183.6)

(192.3)

(199.3)

Gross Profit

 

 

84.5

69.5

72.8

74.6

78.2

81.0

EBITDA

 

 

21.8

21.3

24.5

25.6

27.6

28.7

Operating Profit (before GW and except.)

15.4

15.5

19.5

20.0

21.5

22.4

Intangible Amortisation

 

 

(1.7)

(1.7)

(1.7)

(0.0)

(0.0)

(0.0)

Exceptionals

 

 

(4.3)

(5.1)

2.3

0.0

0.0

0.0

Other

 

 

0.0

0.0

(0.8)

(0.4)

(0.4)

(0.4)

Operating Profit

 

 

9.4

8.7

19.3

19.6

21.1

21.9

Net Interest

 

 

(1.9)

(1.0)

(0.7)

(0.3)

(0.4)

(0.3)

Profit Before Tax (norm)

 

 

13.5

14.5

18.0

19.3

20.8

21.7

Profit Before Tax (FRS 3)

 

 

7.5

7.8

18.6

19.3

20.7

21.7

Tax

 

 

(2.2)

(1.2)

(3.5)

(3.7)

(3.9)

(4.1)

Profit After Tax (norm)

 

 

10.4

12.3

14.4

15.6

16.8

17.6

Profit After Tax (FRS 3)

 

 

4.5

5.0

15.1

15.6

16.8

17.5

 

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

122.3

122.3

128.0

135.3

136.2

136.3

EPS - normalised (p)

 

 

8.5

10.1

11.2

11.6

12.3

12.9

EPS - normalised (p) FD

 

 

 

 

11.2

11.5

12.3

12.8

EPS - FRS 3 (p)

 

 

3.7

4.1

11.8

11.5

12.3

12.9

Dividend per share (p)

 

 

0.0

0.0

4.2

6.4

6.6

6.7

 

 

 

 

 

 

 

 

 

Gross Margin (%)

 

 

28.7

27.2

28.1

28.9

28.9

28.9

EBITDA Margin (%)

 

 

7.4

8.4

9.4

9.9

10.2

10.2

Operating Margin (before GW and except.) (%)

5.2

6.1

7.5

7.7

7.9

8.0

 

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

 

Fixed Assets

 

 

56.9

54.7

53.8

62.1

64.0

64.5

Intangible Assets

 

 

27.9

26.4

24.7

28.8

28.7

29.7

Tangible Assets

 

 

26.1

25.1

26.2

30.4

32.3

31.9

Other

 

 

2.8

3.2

2.9

2.9

2.9

2.9

Current Assets

 

 

59.9

62.1

62.3

65.1

73.6

84.1

Stocks

 

 

20.9

21.7

22.4

22.3

23.4

24.2

Debtors

 

 

37.4

40.1

37.6

39.0

40.7

42.0

Cash

 

 

1.6

0.3

2.3

3.7

9.5

17.9

Current Liabilities

 

 

(53.2)

(54.5)

(49.0)

(50.2)

(52.5)

(54.5)

Creditors

 

 

(49.1)

(51.5)

(48.6)

(50.2)

(52.5)

(54.5)

Short term borrowings

 

 

(4.1)

(3.0)

(0.4)

0.0

0.0

0.0

Long Term Liabilities

 

 

(32.0)

(25.7)

(4.3)

(3.9)

(3.9)

(3.9)

Long term borrowings

 

 

(20.6)

(16.0)

(0.8)

(0.5)

(0.5)

(0.5)

Other long term liabilities

 

 

(11.4)

(9.7)

(3.5)

(3.4)

(3.4)

(3.4)

Net Assets

 

 

31.5

36.6

62.8

73.1

81.2

90.3

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

Operating Cash Flow

 

 

15.7

12.0

19.8

24.7

26.3

27.6

Net Interest

 

 

(1.4)

(0.9)

(0.7)

(0.3)

(0.4)

(0.3)

Tax

 

 

(1.6)

(0.9)

(1.7)

(3.2)

(3.4)

(3.6)

Capex

 

 

(4.6)

(4.9)

(5.6)

(8.8)

(8.0)

(5.9)

Acquisitions/disposals

 

 

(28.2)

(0.2)

0.0

(3.6)

0.0

(0.7)

Financing

 

 

0.0

0.0

10.0

0.0

0.0

0.0

Dividends

 

 

0.0

0.0

(1.9)

(6.7)

(8.7)

(8.8)

Net Cash Flow

 

 

(20.2)

5.1

19.9

2.1

5.8

8.3

Opening net debt/(cash)

 

 

0.5

23.2

18.7

(1.1)

(3.2)

(9.1)

HP finance leases initiated

 

 

(2.5)

(0.5)

(0.3)

(0.3)

0.0

0.0

Other

 

 

0.0

(0.1)

0.2

0.3

(0.0)

0.0

Closing net debt/(cash)

 

 

23.2

18.7

(1.1)

(3.2)

(9.1)

(17.4)

Source: Company accounts, Edison Investment Research

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Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

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