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Research: Industrials
Epwin Group
Written by
Epwin Group |
Meeting FY16 expectations |
Year-end update |
Construction & materials |
7 February 2017 |
Share price performance
Business description
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Analysts
Epwin Group is a research client of Edison Investment Research Limited |
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Year-end commentary included an in-line trading update for FY16. Epwin has progressed in a number of different areas in the year, not least the roll-out of a new window system. FY17 will also have its challenges but we believe there is resilience in the Epwin model and the current rating offers investors scope for good capital growth alongside strong income returns.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/14 |
259.5 |
18.0 |
11.2 |
4.2 |
9.3 |
4.0 |
12/15 |
256.0 |
19.2 |
11.7 |
6.4 |
8.9 |
6.2 |
12/16e |
298.0 |
24.5 |
14.0 |
6.6 |
7.4 |
6.3 |
12/17e |
313.5 |
25.9 |
14.6 |
6.9 |
7.1 |
6.6 |
Note: *PBT and EPS FD are normalised, excluding intangible amortisation and exceptionals.
A year of progress
While market conditions have again been described as challenging, Epwin states that FY16 profitability will be in line with expectations. Our estimates show a good uplift over the prior year; we believe the majority of the y-o-y increase will have been generated by acquisitions (Stormking, Ecodeck and, to a lesser extent, National Plastics). These businesses have added new products and processes to the Epwin portfolio and broadened distribution reach. Within existing operations, we see the successful roll-out of the new Optima window system as significant. It consolidates customer ties, updates the company’s offer and, now the transition is complete, should strengthen market presence in FY17. Elsewhere, we expect roofline and rainwater activities (part of Extrusion & Moulding) to have had a reasonably good year, while Fabrication & Distribution’s performance will continue to reflect some operational challenges previously noted.
Cash flow, input costs and investment
The update also referenced strong cash generation; our end FY16 £23m net debt estimate includes a c £7m H2 net cash inflow and is equivalent to 0.7x our expected EBITDA for the year. Rising input prices are also cited – affecting all UK polymer users – and the extent to which underlying cost management and/or market pricing can recover this will become apparent as FY17 unfolds. Epwin should receive some annualised benefits from National Plastics and will continue to invest in operational improvements across the group. We have made no change to estimates following the year-end trading update.
Valuation: Prospective P/E and yield convergence
Epwin’s share price has mostly traded at 100-110p since mid-2016 and has remained there following the year-end update. On expected FY16 earnings, the company is trading on a P/E of just 7.4x and EV/EBITDA of 5.10x with both metrics prospectively trending lower. Moreover, we expect the final dividend declaration alone to yield in excess of 4% (or 6.3% for the year as a whole). We anticipate further, albeit more modest, earnings and dividend growth for the next two years, the end of which would see P/E and yield parity.
Exhibit 1: Financial summary
£m |
2014 |
2015 |
2016e |
2017e |
2018e |
||
December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|
|
|
|
|
|
|
Revenue |
|
|
259.5 |
256.0 |
298.0 |
313.5 |
321.5 |
Cost of Sales |
|
|
(186.7) |
(178.6) |
(207.9) |
(218.7) |
(224.3) |
Gross Profit |
|
|
72.8 |
77.4 |
90.1 |
94.8 |
97.2 |
EBITDA |
|
|
24.5 |
25.6 |
33.8 |
35.5 |
36.8 |
Operating Profit (before GW and except.) |
19.5 |
20.1 |
26.3 |
27.8 |
28.8 |
||
Intangible Amortisation |
|
|
(1.7) |
(0.0) |
(1.0) |
(1.0) |
(1.0) |
Exceptionals |
|
|
2.3 |
(0.6) |
(0.2) |
0.0 |
0.0 |
Other |
|
|
(0.8) |
(0.4) |
(0.4) |
(0.4) |
(0.4) |
Operating Profit |
|
|
19.3 |
19.1 |
24.7 |
26.4 |
27.4 |
Net Interest |
|
|
(0.7) |
(0.5) |
(1.4) |
(1.5) |
(0.8) |
Profit Before Tax (norm) |
|
|
18.0 |
19.2 |
24.5 |
25.9 |
27.7 |
Profit Before Tax (FRS 3) |
|
|
18.6 |
18.6 |
23.3 |
24.9 |
26.7 |
Tax |
|
|
(3.5) |
(3.3) |
(4.4) |
(4.9) |
(5.3) |
Profit After Tax (norm) |
|
|
14.4 |
15.9 |
20.1 |
20.9 |
22.4 |
Profit After Tax (FRS 3) |
|
|
15.1 |
15.3 |
18.9 |
19.9 |
21.4 |
|
|
|
|
|
|
|
|
Average Number of Shares Outstanding (m) |
|
128.0 |
135.2 |
141.5 |
141.7 |
142.1 |
|
EPS - normalised (p) |
|
|
11.2 |
11.8 |
14.2 |
14.8 |
15.8 |
EPS - normalised fully diluted (p) |
|
|
11.2 |
11.7 |
14.0 |
14.6 |
15.6 |
EPS - FRS 3 (p) |
|
|
11.8 |
11.3 |
13.3 |
14.1 |
15.1 |
Dividend per share (p) |
|
|
4.2 |
6.4 |
6.6 |
6.9 |
7.1 |
|
|
|
|
|
|
|
|
Gross Margin (%) |
|
|
28.1 |
30.2 |
30.2 |
30.2 |
30.2 |
EBITDA Margin (%) |
|
|
9.4 |
10.0 |
11.3 |
11.3 |
11.4 |
Operating Margin (before GW and except.) (%) |
7.5 |
7.9 |
8.8 |
8.9 |
9.0 |
||
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
|
|
Fixed Assets |
|
|
53.8 |
91.7 |
106.9 |
106.7 |
105.2 |
Intangible Assets |
|
|
24.7 |
57.9 |
68.1 |
69.1 |
69.1 |
Tangible Assets |
|
|
26.2 |
33.1 |
38.4 |
37.2 |
35.7 |
Other |
|
|
2.9 |
0.7 |
0.4 |
0.4 |
0.4 |
Current Assets |
|
|
62.3 |
87.2 |
71.2 |
79.7 |
90.6 |
Stocks |
|
|
22.4 |
23.6 |
28.7 |
30.2 |
30.9 |
Debtors |
|
|
37.6 |
41.5 |
45.0 |
47.0 |
48.0 |
Cash |
|
|
2.3 |
22.1 |
(2.4) |
2.6 |
11.6 |
Current Liabilities |
|
|
(49.0) |
(68.8) |
(58.1) |
(61.6) |
(64.4) |
Creditors |
|
|
(48.6) |
(53.2) |
(58.1) |
(61.6) |
(64.4) |
Short term borrowings |
|
|
(0.4) |
(15.6) |
0.0 |
0.0 |
0.0 |
Long Term Liabilities |
|
|
(4.3) |
(30.0) |
(29.9) |
(23.5) |
(18.5) |
Long term borrowings |
|
|
(0.8) |
(20.9) |
(20.6) |
(15.6) |
(10.6) |
Other long term liabilities |
|
|
(3.5) |
(9.1) |
(9.3) |
(7.9) |
(7.9) |
Net Assets |
|
|
62.8 |
80.1 |
90.1 |
101.4 |
112.9 |
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
|
Operating Cash Flow |
|
|
19.8 |
23.8 |
29.0 |
33.9 |
36.0 |
Net Interest |
|
|
(0.7) |
(0.5) |
(1.4) |
(1.5) |
(0.8) |
Tax |
|
|
(1.7) |
(2.3) |
(3.9) |
(4.4) |
(4.8) |
Capex |
|
|
(5.6) |
(9.0) |
(13.0) |
(7.0) |
(6.5) |
Acquisitions/disposals |
|
|
0.0 |
(20.9) |
(10.0) |
(1.5) |
0.0 |
Financing |
|
|
10.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Dividends |
|
|
(1.9) |
(6.7) |
(9.1) |
(9.4) |
(9.9) |
Net Cash Flow |
|
|
19.9 |
(15.6) |
(8.4) |
10.0 |
14.0 |
Opening net debt/(cash) |
|
|
18.7 |
(1.1) |
14.4 |
23.0 |
13.0 |
HP finance leases initiated |
|
|
(0.3) |
0.4 |
(0.4) |
0.0 |
0.0 |
Other |
|
|
0.2 |
(0.3) |
0.2 |
0.0 |
0.0 |
Closing net debt/(cash) |
|
|
(1.1) |
14.4 |
23.0 |
13.0 |
(1.0) |
Source: Company accounts, Edison Investment Research
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