Epwin Group — Solid H223 leads to useful earnings upgrade

Epwin Group (AIM: EPWN)

Last close As at 22/06/2024

GBP0.90

−0.50 (−0.55%)

Market capitalisation

GBP128m

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Research: Industrials

Epwin Group — Solid H223 leads to useful earnings upgrade

Epwin Group’s H223 trading was robust and management has navigated inflationary pressures well. As a result we have increased our FY23 and FY24 underlying operating profit estimates by 13.6% and 10.3%, respectively. Longer term, well-established growth trends imply that Epwin is well placed to leverage off increasing demand for its energy-efficient and low-maintenance building products. Management action contributed to overall margin expansion, a feature that we expect to continue in FY24. Epwin offers an attractive investment case with the potential for uplifts from additional self-funded M&A. It trades on a P/E ratio of 7.4x, some 30% below the long-term average of 10.7x, and yields 6%.

Andy Murphy

Written by

Andy Murphy

Director, Financials & Industrials

Industrials

Epwin Group

Solid H223 leads to useful earnings upgrade

FY23 trading update

Construction and materials

30 January 2024

Price

74p

Market cap

£107m

Net debt (£m) at 31 December 2023

14.5

Shares in issue

144.6m

Free float

67%

Code

EPWN

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.7)

12.1

5.4

Rel (local)

(2.3)

12.1

5.4

52-week high/low

83p

63p

Business description

Epwin Group supplies functional low-maintenance exterior 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 events

Preliminary results

10 April 2024

AGM

May 2024

Analyst

Andy Murphy

+44 (0)20 3077 5700

Epwin Group is a research client of Edison Investment Research Limited

Epwin Group’s H223 trading was robust and management has navigated inflationary pressures well. As a result we have increased our FY23 and FY24 underlying operating profit estimates by 13.6% and 10.3%, respectively. Longer term, well-established growth trends imply that Epwin is well placed to leverage off increasing demand for its energy-efficient and low-maintenance building products. Management action contributed to overall margin expansion, a feature that we expect to continue in FY24. Epwin offers an attractive investment case with the potential for uplifts from additional self-funded M&A. It trades on a P/E ratio of 7.4x, some 30% below the long-term average of 10.7x, and yields 6%.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/21

329.6

13.7

9.2

4.1

8.1

5.5

12/22

355.8

16.5

8.9

4.5

8.3

6.0

12/23e

349.7

18.3

10.0

4.5

7.4

6.1

12/24e

354.9

19.0

10.0

4.6

7.4

6.2

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Robust trading, margins better than expected

Trading continued to be resilient throughout H223, such that the company anticipates FY23 revenue to be in line with the consensus of £349.8m. More importantly, however, it expects underlying operating profit to be ‘towards the upper end’ of the range of £22m to £25m. This is despite a number of inflationary headwinds, and the fact that although PVC resin prices have eased, they remain at elevated levels. Furthermore, management expects net debt to be c £14.5m, c £3.4m lower than consensus despite the ongoing share buyback, implying a net debt to EBITDA ratio of less than c 0.5x.

Consistent strategic focus remains in place

Epwin has for many years followed a set of strategic targets, which drive the development of the business and improve profitability and its sustainability credentials. In 2024 and beyond, we believe Epwin will continue to evolve these strategic targets, which include product and materials development, operational leverage and efficiency, cross-selling and business development, the pursuit of value-enhancing acquisitions and sustainability developments.

Valuation: Revised EPS implies 30% P/E discount

Following the FY trading update, we have raised our FY23 and FY24 underlying EBIT forecasts from £22.0m and £23.0m, respectively, to £24.0m and £24.5m, with potential risks to the upside in both years for earnings and dividends. Our revised forecasts imply normalised EPS of 10.0p in both years, which in turn gives a P/E ratio of 7.4x, a material discount to its long-term average of 10.7x. The company remains acquisitive but, even without M&A, Epwin is cash generative, and we note that the shares offer an attractive 6.1% yield from a twice covered dividend.

Exhibit 1: Financial summary

£m

2020

2021

2022

2023e

2024e

2025e

31-March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

241.0

329.6

355.8

349.7

354.9

358.4

Cost of Sales

(168.8)

(236.9)

(250.5)

(248.3)

(251.1)

(253.4)

Gross Profit

72.2

92.7

105.3

101.4

103.8

105.0

EBITDA

 

 

28.6

36.3

41.6

42.0

42.5

43.7

Normalised operating profit

 

 

9.4

18.5

21.5

24.0

24.5

25.7

Share-based payments

0.0

0.0

0.0

0.0

0.0

0.0

Operating profit - Underlying

9.4

18.5

21.5

24.0

24.5

25.7

Amortisation of acquired intangibles

(0.3)

(0.3)

(0.3)

(0.6)

(0.6)

(0.6)

Exceptionals

(2.8)

(0.1)

(3.7)

0.0

0.0

0.0

Impairment

0.0

0.0

0.0

0.0

0.0

0.0

Other

0.0

(0.4)

(0.6)

(0.6)

(0.6)

(0.6)

Reported operating profit

6.3

17.7

16.9

22.8

23.3

24.5

Net Interest

(4.4)

(4.8)

(5.0)

(5.7)

(5.5)

(5.5)

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

5.0

13.7

16.5

18.3

19.0

20.2

PBT - Underlying

 

 

-

-

-

-

-

-

Profit Before Tax (reported)

 

 

1.9

12.9

11.9

17.1

17.8

19.0

Reported tax

0.7

(0.4)

(3.5)

(3.8)

(4.4)

(4.8)

Profit After Tax (norm)

5.7

13.3

13.0

14.6

14.5

15.5

Profit After Tax (reported)

2.6

12.5

8.4

13.4

13.3

14.3

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Discontinued operations

0.0

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

5.7

13.3

13.0

14.6

14.5

15.5

Net income (reported)

2.6

12.5

8.4

13.4

13.3

14.3

Basic average number of shares outstanding (m)

143

145

145

145

145

145

EPS - basic normalised (p)

 

 

3.99

9.16

8.95

10.03

10.00

10.65

EPS - diluted normalised (p)

 

 

3.98

9.06

8.84

9.89

9.85

10.50

EPS - Diluted, underlying

 

 

-

-

-

-

-

-

EPS - basic reported (p)

 

 

1.82

8.61

5.78

9.21

9.17

9.83

Dividend (p)

1.00

4.10

4.45

4.50

4.60

4.80

Revenue growth (%)

(-14.6)

36.8

7.9

(-1.7)

0.0

0.0

Gross Margin (%)

30.0

28.1

29.6

29.0

29.3

29.3

EBITDA Margin (%)

11.9

11.0

11.7

12.0

12.0

12.2

Normalised Operating Margin

3.9

5.6

6.0

6.9

6.9

7.2

BALANCE SHEET

Fixed Assets

 

 

176.9

177.0

209.9

201.1

193.9

187.7

Intangible Assets

75.0

77.9

99.5

98.9

98.3

97.7

Tangible Assets

29.5

28.5

34.3

30.2

27.7

26.2

Investments & other

72.4

70.6

76.1

72.0

67.9

63.8

Current Assets

 

 

87.2

94.6

97.6

98.2

99.6

100.4

Stocks

29.6

41.0

41.1

40.9

41.7

42.1

Debtors

44.3

43.6

40.5

41.3

41.9

42.3

Cash & cash equivalents

13.1

9.8

15.1

15.1

15.1

15.1

Other

0.2

0.2

0.9

0.9

0.9

0.9

Current Liabilities

 

 

(79.0)

(83.0)

(83.9)

(85.5)

(86.6)

(87.4)

Creditors

(57.6)

(71.5)

(72.5)

(74.1)

(75.2)

(76.0)

Tax and social security

0.0

(0.4)

0.0

0.0

0.0

0.0

Short term borrowings

(10.9)

(0.5)

0.0

0.0

0.0

0.0

Other

(10.5)

(10.6)

(11.4)

(11.4)

(11.4)

(11.4)

Long Term Liabilities

 

 

(96.3)

(90.3)

(122.5)

(105.7)

(92.0)

(78.3)

Long term borrowings

(17.3)

(14.6)

(29.8)

(26.5)

(26.3)

(26.1)

Other long term liabilities

(79.0)

(75.7)

(92.7)

(79.2)

(65.7)

(52.2)

Net Assets

 

 

88.8

98.3

101.1

108.0

114.8

122.4

Minority interests

0.0

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

88.8

98.3

101.1

108.0

114.8

122.4

CASH FLOW

Op Cash Flow before WC and tax

28.6

36.3

41.6

42.0

42.5

43.7

Working capital

(1.8)

(1.4)

1.4

1.2

(0.2)

0.0

Exceptional & other

(3.1)

0.0

(4.4)

0.0

0.0

0.0

Tax

(0.8)

(0.5)

(2.2)

(3.8)

(4.4)

(4.8)

Other

0.0

0.0

0.0

0.0

0.0

0.0

Net operating cash flow

 

 

22.9

34.4

36.4

39.4

37.8

39.0

Capex

(8.0)

(0.6)

(9.1)

(11.9)

(11.5)

(11.5)

Acquisitions/disposals

0.0

(5.3)

(18.1)

(2.0)

(4.0)

(5.0)

Net interest

(1.4)

(1.5)

(1.6)

(2.3)

(2.1)

(2.1)

Equity financing

0.0

(0.4)

0.0

0.0

0.0

0.0

Dividends

0.0

(4.0)

(6.2)

(6.5)

(6.5)

(6.7)

Other

(15.6)

(13.5)

(9.9)

(13.5)

(13.5)

(13.5)

Net Cash Flow

(2.1)

9.1

(8.5)

3.3

0.2

0.2

Opening net debt/(cash)

 

 

16.4

18.5

9.4

17.9

14.6

14.4

Closing net debt/(cash)

 

 

18.5

9.4

17.9

14.6

14.4

14.2

Source: Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Epwin Group and prepared and issued by Edison, in consideration of a fee payable by Epwin Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Epwin Group and prepared and issued by Edison, in consideration of a fee payable by Epwin Group. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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