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Currency in GBP
Last close As at 26/05/2023
GBP0.68
▲ −0.50 (−0.74%)
Market capitalisation
GBP98m
Research: Industrials
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.
Epwin Group |
Solid results highlight management action |
FY22 results |
Construction and materials |
5 May 2023 |
Share price performance
Business description
Next events
Analyst
Epwin Group is a research client of Edison Investment Research Limited |
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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 |
PBT* |
EPS* |
DPS |
P/E |
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
|
|
Research: Financials
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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