FY24 results reflect fourth year of continued growth
Epwin’s FY24 results were modestly ahead of market expectations, driven in particular
by a c 13% increase in profit from the Extrusion and Moulding (E&M) division, and
offset by a decline in profit from the smaller Fabrication and Distribution division.
This is the fourth consecutive year of robust profit growth and the third year of
profit above the pre-COVID-19 level in FY19. Management continues to focus on operational
efficiency, new product development, sustainability and shareholder returns via dividends
and share buybacks. Furthermore, the balance sheet is unstretched and provides M&A
optionality. In the meantime, markets are beginning to reflect growth and underlying
medium- and long-term drivers remain intact.
FY24 results confirm underlying profit growth trend
Epwin’s FY24 results were robust in challenging markets and came in marginally ahead
of market expectations. Revenue was down 6% to £324m, largely due to lower surcharges
on previously high PVC input prices, augmented by subdued demand. However, due to
careful management of the balance between volume and margin, as well as a keen focus
on operational efficiency, underlying operating profit rose 3% to £26.2m. This implied
an operating margin increase of 70bp to 8.1%.
Interest costs declined, pushing underlying PBT up c 6% to £19.0m, and adjusted diluted
EPS rose 4% to 10.0p. In line with company policy, the total dividend was increased
6% to 5.1p, implying cover of c 2x. Net debt increased modestly to £15.4m despite
capital expenditure of £8.0m, £3.0m of acquisition expenditure and the return of £14.1m
to shareholders via increased dividends and the extended share buyback programme.
| Exhibit 1: Full year results summary (£m) |
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| Source: Epwin, Edison Investment Research |
Given the tough trading environment, management was heavily focused on driving operational
and manufacturing efficiency by increasing inter-divisional collaboration to extract
value. A new IT system was completed across the distribution network and is now delivering
both commercial and operational benefits.
Epwin completed three bolt-on acquisitions in the period, investing £3.0m, and is
assessing a healthy pipeline of other potential acquisitions. The company also continued
its new product development initiatives, expanding its complementary product range
and increasing the usage of recycled materials to reduce waste and cost. During the
year, Epwin became the UK’s first cellular PVC and glass reinforced plastic manufacturer
to obtain certified environmental product declarations across a range of products,
highlighting the company’s commitment to sustainability.
Epwin has been trading well and, since September, it has enjoyed monthly revenue ahead
of the comparative periods despite the subdued markets. Management’s actions continue
to position the company to withstand the tough trading conditions and benefit from
any future recovery, supported by the medium- and long-term market drivers that remain
in place.
Epwin’s largest division, E&M, reported revenue down 8% to £192.8m, affected by lower
surcharges on PVC input costs as input prices fell and reduced volumes from subdued
conditions in both the private housing RMI and new build markets. The increase in
group operating profit was driven by the improvement in profit from the E&M division,
which increased from £21.6m to £24.5m, as the division benefited from management action
taken in FY23 and FY24 on pricing and operational efficiency, as well as the impact
of lower surcharges, which resulted in underlying operating margins increasing from
10.3% to 12.7%, comfortably exceeding the FY19 pre-pandemic level of 10.5%. In the year, Epwin made progress on a number of fronts in the division including increasing the use of recycled materials within extruded products and extended the product range and market opportunities for reprocessed materials.
| Exhibit 2: Divisional revenue, last six years |
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| Source: Epwin, Edison Investment Research |
In Fabrication and Distribution, revenue slipped 3% to £131.2m, primarily affected
by reduced volumes in the distribution network as uncertainty led to homeowners holding
back on discretionary expenditure. Underlying operating profit declined from £7.4m
to £5.3m as increased competition for lower volumes in distribution led to margin
pressure. The operating margin fell back to 4.0%, which is broadly in line with the
pre-COVID-19 margin of 4.4%. Epwin continues to focus on balancing profitability and
market share via disciplined and responsible pricing.
| Exhibit 3: Operating profit and operating margins by division, last six years |
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| Source: Epwin, Edison Investment Research |
Within the Fabrication and Distribution division, in Fabrication, which accounts for
around a third of revenue, both the Trade and Social revenues outperformed the CPA
estimate of market growth, implying that Epwin took market share. In Distribution,
which accounts for roughly half the divisional revenue, revenue fell year-on-year
as the end-user market came under pressure. The business made progress on integration
and consolidation of the trade counter distribution business. The IT system consolidation
was completed in H124, and additional cross-selling opportunities between the fabrication
and distribution businesses continue to be realised.
Extended share buyback to complete in Q225
In November 2023, Epwin announced its intention to repurchase up to 3m shares for
cancellation. This was completed and was followed by a second programme of a similar
number of shares at the FY23 results in April 2024. This was subsequently extended
by a further 5m shares in September 2024 as the company sought to take advantage of
its robust cash flow and attractively priced shares. The company anticipates completing
the programme during Q225. In FY24 Epwin repurchased and cancelled 8.0m shares under
the buyback programme at a cost of £7.2m. It also issued, repurchased and cancelled
a further 0.8m shares at a cost of £0.6m. The 8.8m shares repurchased and cancelled
represented 6.1% of the issued share capital at the start of 2024.
We believe there is c £1m of repurchasing outstanding for the current share buy-back
programme. It remains to be seen if the company will extend it again, but we believe
it has the capacity to do so, should management believe it is in the best interest
of shareholders.
Estimate changes limited to a reduction in net debt
Our underlying revenue and profit estimates for FY25 and FY26 are essentially unchanged,
although it is worth noting here that Epwin will be absorbing c £3m of additional
employers’ National Insurance and minimum wage cost increases from 1 April 2025. Furthermore,
FY24 net debt was c £3m better than we had anticipated and this is reflected in our
revised FY25 and FY26 net debt estimates, which continue to reduce slowly.
We believe that there is c £1m of outstanding expenditure to be completed in the current
share buy-back programme, which is reflected in our forecasts. We cannot rule out
another extension, though at this stage we are not forecasting such an event.
| Exhibit 4: Revised estimates (£m) |
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| Source: Epwin, Edison Investment Research |
Material valuation discount to long-term average
Epwin trades on a P/E ratio of 8.7x to December 2025, which is a visible discount
to its long-term average of 10.5x, suggesting material upside. Furthermore, the company
is acquisitive and has more than £60m of investment headroom on its borrowing facilities.
This offers considerable potential for value-enhancing M&A activity. Epwin is cash
generative and we anticipate that debt will decline, albeit slowly until FY26 due
to the earnout relating to Poly-Pure. Thereafter, in the absence of further deals
we expect net debt to decline rapidly. We also note that despite the valuation discount,
the shares offer an attractive prospective 5.5% yield from a dividend that is twice
covered.
| Exhibit 5: Epwin’s forward P/E ratio (x) |
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| Source: LSEG Data & Analytics |
The Epwin investment case
Epwin has a near 50-year history since it began as the first PVC-U window fabrication
business in 1976. It now sells a wide range of additional products, including doors
and door frames, conservatories, cladding and rainwater systems, to name a few. It
has developed a number of well known brands in numerous product segments and fostered
multiple routes to market that include selling direct to business customers such as
the national housebuilders, social housing providers, builders merchants and general
builders as well as specialist stockists, wholesalers, installers and window fabricators.
In support of Epwin’s robust market position, it continues to invest in innovation
and new products and systems. Its Stellar window range and Dekboard are two examples
of this. It also continues to focus on operational efficiencies that will drive medium-term
margin improvements, potentially to levels in excess of the long-term average. Finally,
its cash-generative characteristics and low levels of gearing allow it to participate
in M&A when the right opportunities arise. Poly-Pure, the PVC re,processor, and Hampton
Decking, both acquired in 2022, are examples of this.
| Exhibit 6: Epwin’s product range |
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| Source: Epwin Group |
Over the last 10 years, Epwin has maintained a robust revenue stream despite the multiple
headwinds that have been thrown at the sector, including Brexit, COVID-19 and more
recently the implications of a high inflation environment. During most of this extended
period, both profits and margins were on an upward trend until 2020. Recovery was
seen in 2021 and growth has been a consistent feature since. Short-term trends offer
some optimism, but longer-term trends are arguably more encouraging when one considers
Epwin’s position in the market and other long-term drivers.
Firstly, Epwin is the largest UK manufacturer of PVC window profile systems, roofline
and cladding products and glass reinforced plastic (GRP) mouldings used in housebuilding.
It has around a 20% market share in the former, a c 40%+ share of the cellular roofline
market and around a 40% share of the GRP market.
Secondly, the construction and RMI markets have positive long-term trends. For example,
the UK has a growing population and an increasing tendency for people to live alone,
so there is likely to be underlying demand for new homes to be built. An increasing
and ageing stock of housing also points towards increased requirements for building
materials to address RMI demand.
