Epwin Group — Solid results highlight management action

Epwin Group (AIM: EPWN)

Last close As at 20/04/2024

GBP0.86

0.00 (0.00%)

Market capitalisation

GBP123m

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Research: Industrials

Epwin Group — Solid results highlight management action

Epwin’s FY22 results highlight both the challenging trading environment but also management’s ability to successfully handle inflationary pressures. Well-established long-term growth trends imply that Epwin is well placed to leverage off increasing demand for its energy efficient and low-maintenance building products. The acquisition of Poly-Pure and Mayfield underscore the company’s ambition and ability to self-finance accretive expansion. We anticipate further deals in the foreseeable future. Epwin trades on a P/E of 8.3x for FY23e versus a long-term average of 10.9x, with upside as and when margins recover further.

Andy Murphy

Written by

Andy Murphy

Director, Financials & Industrials

Industrials

Epwin Group

Solid results highlight management action

FY22 results

Construction and materials

5 May 2023

Price

75.5p

Market cap

£109m

Net debt (£m) at 31 December 2022

18.6

Shares in issue

144.9

Free float

67%

Code

EPWN

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.4)

(6.6)

(18.4)

Rel (local)

(4.5)

(3.5)

(19.5)

52-week high/low

86.0p

68.0p

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

Q1 trading update

May 2023

Interims

August 2023

Analyst

Andy Murphy

+44 (0)20 3077 5700

Epwin Group is a research client of Edison Investment Research Limited

Epwin’s FY22 results highlight both the challenging trading environment but also management’s ability to successfully handle inflationary pressures. Well-established long-term growth trends imply that Epwin is well placed to leverage off increasing demand for its energy efficient and low-maintenance building products. The acquisition of Poly-Pure and Mayfield underscore the company’s ambition and ability to self-finance accretive expansion. We anticipate further deals in the foreseeable future. Epwin trades on a P/E of 8.3x for FY23e versus a long-term average of 10.9x, with upside as and when margins recover further.

Year end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/21

329.6

13.7

9.2

4.1

8.3

5.5

12/22

355.8

16.5

8.9

4.5

8.3

6.0

12/23e

355.9

16.3

9.0

4.5

8.3

6.1

12/24e

361.2

17.3

9.1

4.6

8.1

6.2

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

FY22 revenue up c 8%, H2 profit growth accelerates

Epwin recorded FY22 revenue growth of 7.9%, which reflected inflation-related price increases and M&A, offset by modest volume reductions. Operating profit rose 16.2% for the full year, which implied an acceleration from 13.8% in H1 to 18.7% in H2. Overall, the underlying operating margin increased from 5.6% in FY21 to 6.0% in FY22, which was an impressive result considering the high input cost inflation. Adjusted PBT increased 23.4% to £16.5m, which is within a whisker of the record level of £17.2m reported in 2018. Net debt increased by c £9m to £18.6m after investing c £18m in M&A, but gearing remains low at 0.6x net debt/EBITDA.

Long-term growth drivers remain intact

Epwin is well placed to benefit from numerous medium- and long-term growth drivers. These include a growing population and a declining residential occupancy rate that is driving an increase in the housing stock, underinvestment in the existing and ageing housing stock, as well as an increasing demand for thermally efficient products that are capable of reducing carbon emissions, thus highlighting Epwin’s ESG offering. In addition to these drivers, Epwin has consistently made steady progress on strategic initiatives that contribute to additional growth.

Valuation: 25% P/E discount and >6% yield

Epwin trades on a P/E ratio of 8.3x to December 2023, which is a material discount to its long-term average of 10.9x, suggesting material upside. Furthermore, the company is acquisitive and has more than £50m of investment headroom on its balance sheet (discussed in our interim results note in November), which offers considerable potential for value-enhancing M&A activity. Furthermore, even without M&A, Epwin is a cash-generative company; we expect debt to fall rapidly over FY23–24 and note the shares offer an attractive 6.1% yield from a dividend that is twice covered.

Prelims highlight steady progress in tough markets

Epwin’s FY22 results confirmed a steady performance in relatively tough markets that were characterised by good demand, but hampered by unusually high input cost inflation. That said, management action to pass on higher costs not only resulted in a revenue uplift, but also in material margin expansion, a feature that we expect to continue in FY23 and FY24 as cost pressures become less of a headwind. Epwin offers an attractive investment case with the potential for uplifts from additional self-funded M&A. We have maintained our forecasts for FY23 and FY24 given market uncertainty, but seek to highlight the low valuation and attractive 6.1% yield.

Revenue up c 8%, margins expand by 140bp

Epwin recorded FY22 revenue growth of 7.9%, which reflected inflation-related price increases and M&A, offset by modest volume reductions. Operating profit rose 16.2% for the full year, which implied an acceleration from growth of 13.8% in H1 to 18.7% in H2. Overall, the underlying operating margin increased from 5.6% in FY21 to 6.0% in FY22, an impressive result considering the input cost inflation. Adjusted PBT increased by 23.4% to £16.5m, which is within a whisker of the record level of £17.2m reported in 2018.

Exhibit 1: Full-year results summary (£m)

FY19

FY20

FY21

FY22

Y-o-y % chg

Total revenues from external customers

282.1

241.0

329.6

355.8

7.9%

Underlying operating profit

21.2

9.4

18.5

21.5

16.2%

Underlying operating margin

7.5%

3.9%

5.6%

6.0%

-

Adjusted PBT

16.4

5.0

13.7

16.5

23.4%

Profit before tax (post exceptionals and other)

12.4

1.9

12.9

11.9

(7.8%)

EPS - diluted, adjusted (p)

10.3

4.0

9.1

8.8

(2.5%_

Dividend per share (p)

1.8

1.0

4.1

4.5

8.5%

Underlying net (debt)

(16.4)

(18.5)

(9.4)

(18.6)

97.9%

Source: Epwin, Edison Investment Research

EPS declined due to the inclusion of exceptional costs including the partial write-down of goodwill on the Edodek acquisition from 2015, but the dividend was raised 8.5% to 4.5p, implying c 2x cover. Net debt increased c £9m, reflecting the £18.1m invested in the acquisitions of Poly-Pure in September 2022 and Hampton Decking in December 2022.

The £26.2m increase in revenue to £355.8m was the net result of price increases and surcharges offset by lower volumes, and M&A activity where the in-year purchases of Poly-Pure contributed income of £3.8m. In terms of the increase in underlying operating profit of £3.0m to £21.5m, this positive outcome is the net result of the price increases and surcharges mentioned above and a £0.6m contribution from M&A, offset by lower volumes, material cost increases and a rise in people and other costs. On a two-year view, Epwin has managed the cost inflation situation well and has offset the significant increase in material, labour and other costs, returning operating profit to pre-pandemic levels (FY19: £21.2m).

Revenue in the Extrusion and Moulding (E&M) division increased 9% to £221.1m, benefiting from continued price inflation and surcharges, and includes a 1.7% contribution, or £3.4m, from the Poly-Pure acquisition. Window Systems, which accounts for c 45% of divisional revenue, drove revenue 9% higher, mainly through price increases to address significant material cost inflation. Roofline, rainwater and decking, which account for a further c 35% collectively, grew revenue c 5% on top of the strong performance in 2021. Margins recovered from 6.0% to 7.6% (see Exhibit 3), which is still below the FY19 peak of 10.5%. However, it should be noted that the H222 margin of 8.0%, was 200bp ahead of FY21 and 80bp ahead of H122, suggesting that management action to control costs and raise prices is having a meaningful impact.

Exhibit 2: FY divisional revenue, last four years

Source: Epwin

In Fabrication and Distribution (F&D), revenue increased 5.8% to £134.7m, again mainly driven by price increases. Mayfield contributed less than 1% to the overall growth. Fabrication accounts for c 30% of divisional revenue, and saw trade and social revenue up 9% and 6% respectively.

In Distribution, which accounts for c 55% of divisional activity, like-for-like revenue was ‘slightly down’, reflecting softening end-user markets particularly towards the end of H2. The overall margin for the division was affected by higher input costs both from the Extrusion and Moulding divisions as well as from other external suppliers. However, even at 5.6%, the operating margin is comfortably higher than the 4.4% reported in 2019. Epwin continues to make progress on the integration and consolidation of the trade counter distribution business. It is also continuing with selective strategic development of its own distribution while remaining committed to serving the independent distributor market.

Exhibit 3: FY operating profit and operating margins by division, last four years

Source: Epwin, Edison Investment Research

Market outlook remains supportive; unchanged estimates

The market outlook for FY23 remains uncertain, but there are market expectations that any downturn may not be as bad as previously expected. Management stated in the preliminary announcement that trading is in line with expectations against a strong comparative in FY22. Operational challenges in Window Systems are being resolved and raw material inflation pressures are being addressed successfully. In the medium to long term, the key drivers of demand remained in place, such as an aging housing stock and growing population, a propensity to holiday in the UK and increased environmental concerns. In addition, hybrid working habits are encouraging people to spend money on home improvements and enhancements to outdoor spaces.

Our FY23 and FY24 forecasts are essentially unchanged after the results announcement. We anticipate very modest revenue growth given the uncertainties in the markets that prevail, but also expect some progress in the operating margin in both years such that ‘normalised’ operating profit progresses from £21.5m in FY22, to £22.0m in FY23 and £23.0m in FY24. The increase in net debt, particularly in FY24, reflects the anticipated payment of the earnout of Poly-Pure.

Exhibit 4: Revised estimates (£m)

2022

2023

2024

Old

New

% chg

Old

New

% chg

Revenue

355.8

356.0

355.9

0.0%

361.2

361.2

0.0%

YoY % change

6.0%

2.0%

0.0%

-

1.5%

1.5%

-

EBITDA - Edison basis

41.6

40.5

40.0

-1.1%

41.5

41.0

-1.2%

YoY % change

4.9%

3.9%

-3.7%

-

2.5%

2.4%

-

EBITDA - Reported pre IFRS 16

 

31.0

27.0

26.5

-1.7%

28.0

27.5

-1.8%

YoY % change

 

23.7%

5.4%

-14.4%

-

3.7%

3.6%

-

Normalised operating profit

21.5

22.0

22.0

0.2%

23.0

23.0

0.0%

YoY % change

8.0%

7.5%

2.5%

-

4.5%

4.3%

-

PBT (Reported, pre-exceptionals)

11.9

15.6

15.1

-2.9%

17.1

16.1

-5.9%

YoY % change

7.6%

11.7%

27.3%

-

9.6%

6.3%

-

EPS - Diluted, normalised

8.8

8.7

8.8

1.5%

9.2

9.0

-2.1%

YoY % change

-10.2%

7.1%

-0.1%

-

5.7%

2.0%

-

DPS

4.5

4.5

4.5

0.0%

4.8

4.6

-4.2%

YoY % change

2.4%

7.1%

1.1%

-

6.7%

2.2%

-

Net (debt)/cash (pre IFRS 16)

-18.6

-16.2

-17.4

7.4%

-9.8

-17.1

74.7%

YoY % change

138.1%

-85.5%

-6.5%

-

-39.5%

-1.6%

-

Source: Epwin, Edison Investment Research

Epwin trades on a c 25% P/E discount

Epwin trades on a P/E ratio of 8.3x to December 2022, which is a material discount to its long-term average of 10.9x, suggesting material upside. Furthermore, the company is acquisitive and has more than £50m of investment headroom on its balance sheet, which was discussed in our interim results note in November. This offers considerable potential for value-enhancing M&A activity. Furthermore, even without M&A, Epwin is cash generative; we expect debt to fall rapidly over FY23–24 and note that the shares offer an attractive 6.1% yield from a dividend that is twice covered.

Exhibit 5: Epwin’s forward P/E ratio (x)

Source: Refinitiv


Exhibit 6: Financial summary

£m

2019

2020

2021

2022

2023e

2024e

2025e

31-March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

282.1

241.0

329.6

355.8

355.9

361.2

364.8

Cost of Sales

(193.3)

(168.8)

(236.9)

(250.5)

(252.7)

(255.6)

(257.9)

Gross Profit

88.8

72.2

92.7

105.3

103.2

105.7

106.9

EBITDA

 

 

40.4

28.6

36.3

41.6

40.0

41.0

42.4

Normalised operating profit

 

 

21.2

9.4

18.5

21.5

22.0

23.0

24.4

Share-based payments

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Operating profit - Underlying

21.2

9.4

18.5

21.5

22.0

23.0

24.4

Amortisation of acquired intangibles

(0.3)

(0.3)

(0.3)

(0.3)

(0.6)

(0.6)

(0.6)

Exceptionals

(2.3)

(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

0.0

Other

(1.4)

0.0

(0.4)

(0.6)

(0.6)

(0.6)

(0.6)

Reported operating profit

17.2

6.3

17.7

16.9

20.8

21.8

23.2

Net Interest

(4.8)

(4.4)

(4.8)

(5.0)

(5.7)

(5.7)

(5.6)

Joint ventures & associates (post tax)

0.0

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

0.0

Profit Before Tax (norm)

 

 

16.4

5.0

13.7

16.5

16.3

17.3

18.8

Profit Before Tax (reported)

 

 

12.4

1.9

12.9

11.9

15.1

16.1

17.6

Reported tax

(1.7)

0.7

(0.4)

(3.5)

(3.3)

(4.0)

(4.4)

Profit After Tax (norm)

14.7

5.7

13.3

13.0

13.0

13.3

14.4

Profit After Tax (reported)

10.7

2.6

12.5

8.4

11.8

12.1

13.2

Net income (normalised)

14.7

5.7

13.3

13.0

13.0

13.3

14.4

Net income (reported)

10.7

2.6

12.5

8.4

11.8

12.1

13.2

Basic average number of shares outstanding (m)

143

143

145

145

145

145

145

EPS - basic normalised (p)

 

 

10.29

3.99

9.16

8.95

8.96

9.14

9.93

EPS - diluted normalised (p)

 

 

10.27

3.98

9.06

8.84

8.83

9.01

9.79

EPS - basic reported (p)

 

 

7.49

1.82

8.61

5.78

8.13

8.31

9.11

Dividend (p)

1.75

1.00

4.10

4.45

4.50

4.60

4.80

Revenue growth (%)

0.4

(-14.6)

36.8

7.9

0.0

0.0

0.0

Gross Margin (%)

31.5

30.0

28.1

29.6

29.0

29.3

29.3

EBITDA Margin (%)

14.3

11.9

11.0

11.7

11.3

11.3

11.6

Normalised Operating Margin

7.5

3.9

5.6

6.0

6.2

6.4

6.7

BALANCE SHEET

Fixed Assets

 

 

182.3

176.9

177.0

209.9

201.1

194.9

188.7

Intangible Assets

75.7

75.0

77.9

99.5

98.9

98.3

97.7

Tangible Assets

46.1

29.5

28.5

34.3

30.2

28.7

27.2

Investments & other

60.5

72.4

70.6

76.1

72.0

67.9

63.8

Current Assets

 

 

91.5

87.2

94.6

97.6

100.0

99.1

98.1

Stocks

30.3

29.6

41.0

41.1

42.0

41.5

41.0

Debtors

43.6

44.3

43.6

40.5

42.0

41.5

41.0

Cash & cash equivalents

17.2

13.1

9.8

15.1

15.1

15.1

15.1

Other

0.4

0.2

0.2

0.9

0.9

0.9

0.9

Current Liabilities

 

 

(86.3)

(79.0)

(83.0)

(83.9)

(86.8)

(88.0)

(88.7)

Creditors

(75.2)

(57.6)

(71.5)

(72.5)

(75.4)

(76.6)

(77.3)

Tax and social security

(1.0)

0.0

(0.4)

0.0

0.0

0.0

0.0

Short term borrowings

0.0

(10.9)

(0.5)

0.0

0.0

0.0

0.0

Other

(10.1)

(10.5)

(10.6)

(11.4)

(11.4)

(11.4)

(11.4)

Long Term Liabilities

 

 

(98.7)

(96.3)

(90.3)

(122.5)

(107.8)

(94.0)

(79.5)

Long term borrowings

(32.3)

(17.3)

(14.6)

(29.8)

(28.6)

(28.3)

(27.3)

Other long term liabilities

(66.4)

(79.0)

(75.7)

(92.7)

(79.2)

(65.7)

(52.2)

Shareholders' equity

 

 

88.8

88.8

98.3

101.1

106.4

112.0

118.5

CASH FLOW

Op Cash Flow before WC and tax

40.4

28.6

36.3

41.6

40.0

41.0

42.4

Working capital

(1.8)

(1.8)

(1.4)

1.4

0.7

2.1

1.9

Exceptional & other

(3.8)

(3.1)

0.0

(4.4)

0.0

0.0

0.0

Tax

(3.3)

(0.8)

(0.5)

(2.2)

(3.3)

(4.0)

(4.4)

Net operating cash flow

 

 

31.5

22.9

34.4

36.4

37.4

39.1

39.9

Capex

1.6

(8.0)

(0.6)

(9.1)

(11.9)

(11.5)

(11.5)

Acquisitions/disposals

(2.3)

0.0

(5.3)

(18.1)

(2.0)

(5.0)

(5.0)

Net interest

(1.6)

(1.4)

(1.5)

(1.6)

(2.3)

(2.3)

(2.2)

Equity financing

0.0

0.0

(0.4)

0.0

0.0

0.0

0.0

Dividends

(7.1)

0.0

(4.0)

(6.2)

(6.5)

(6.5)

(6.7)

Other

(13.7)

(15.6)

(13.5)

(10.6)

(13.5)

(13.5)

(13.5)

Net Cash Flow

8.4

(2.1)

9.1

(9.2)

1.2

0.3

1.0

Opening net debt/(cash)

 

 

24.8

16.4

18.5

9.4

18.6

17.4

17.1

Other non-cash movements

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

16.4

18.5

9.4

18.6

17.4

17.1

16.1

Source: Epwin accounts, Edison Investment Research


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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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Australia

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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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Record — Strong inflows in FY23

In FY23, Record’s assets under management equivalent (AUME) increased by 5.5% to $87.7bn (FY22: $83.1bn). Full year inflows were strong at $9.1bn (FY22: $2.4bn), or 11% of opening AUME, although marginal outflows of $0.1bn were recorded in Q423. In its trading statement, management points to its expectation of continued growth in FY24 in a more normalised FX volatility environment and in delivering new and higher-margin revenue streams through product development.

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