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Research: Industrials
Epwin’s H123 results confirmed a solid performance that was characterised by weaker volumes offset by cost control, higher prices and some contribution from M&A in tough markets. 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 FY23 and FY24 as material 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 but highlight the low valuation and attractive 6.7% yield.
Epwin Group |
Strategic progress in tough markets |
H123 results |
Construction and materials |
19 October 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 H123 results confirmed a solid performance that was characterised by weaker volumes offset by cost control, higher prices and some contribution from M&A in tough markets. 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 FY23 and FY24 as material 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 but highlight the low valuation and attractive 6.7% yield.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/21 |
329.6 |
13.7 |
9.2 |
4.1 |
7.3 |
6.1 |
12/22 |
355.8 |
16.5 |
8.9 |
4.5 |
7.5 |
6.6 |
12/23e |
355.9 |
16.3 |
9.0 |
4.5 |
7.5 |
6.7 |
12/24e |
361.2 |
17.3 |
9.1 |
4.6 |
7.3 |
6.9 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Solid results in tough markets
Epwin grew H123 revenue by 1.1% to £180.0m, which reflected inflation-related price increases and M&A, offset by modest volume reductions. Operating profit rose 11.2% to £11.9m, implying that the underlying operating margin increased 60bp, an impressive result considering the input cost inflation pressure. Adjusted PBT increased 4.8% to £8.7m, partially benefiting from M&A. EPS edged up 2.6% to 4.7p and the dividend was raised 5.3% to 2.0p, reflecting management’s confidence in the underlying performance and the solid outlook. Net debt increased c £9m, reflecting the £18.1m invested in the acquisitions last year, but was down £1.8m when compared to the December 2022 position.
Clear focus on continued strategic development
For many years Epwin has followed a set of strategic targets that drive the development of the business and improve the revenue, profitability and ESG standing of the group. In 2023 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 ESG development.
Valuation: P/E of 7.5x vs long-term average of 10.7x
Our FY23 forecasts remain unchanged, which implies that Epwin trades on a P/E ratio of just 7.5x to December 2023, a material discount to its long-term average of 10.7x. The company remains acquisitive and has an estimated net debt to EBITDA ratio of c 0.6x at December 2023, with risks to the downside. Furthermore, even without M&A, Epwin is cash generative; we expect debt to decline over FY23–24 and note that the shares offer an attractive 6.7% yield from a twice covered dividend.
Solid trading in tough markets; valuation attractive
Epwin’s H123 results confirmed a solid performance that was characterised by weaker volumes offset by cost control, higher prices and some contribution from M&A in tough markets. Management action to pass on higher costs offset some of the volume pressure and contributed to overall margin expansion, a feature that we expect to continue in FY23 and FY24 as material 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 despite the market uncertainty, but seek to highlight the low valuation and attractive 6.7% yield.
Interim results in line; management confirms FY23 expectations
Epwin grew H123 revenue by 1.1% to £180.0m, which reflected inflation-related price increases of c 1.7% and M&A adding c 4.1%, offset by volume reductions of c 4.7%. Operating profit rose 11.2% to £11.9m, implying that the underlying operating margin increased 60bp, from 6.0% to 6.6%, an impressive result considering the input cost inflation pressure. Adjusted PBT increased 4.8% to £8.7m, which was comfortably ahead of £7.3m in H119 (ie pre-COVID), partially benefiting from M&A.
EPS edged up 2.6% to 4.7p and the dividend was raised 5.3% to 2.0p, reflecting management’s confidence in the underlying performance and the solid outlook. 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, but was down £1.8m when compared to December 2022.
Exhibit 1: Interim results summary
£m |
H119 |
H120 |
H121 |
H122 |
H123 |
Y-o-y % chg |
|
Total revenues from external customers |
140.0 |
93.3 |
157.8 |
178.0 |
180.0 |
1.1% |
|
Underlying operating profit |
9.4 |
(1.8) |
9.4 |
10.7 |
11.9 |
11.2% |
|
Underlying operating margin |
6.7% |
-1.9% |
6.0% |
6.0% |
6.6% |
- |
|
Adjusted PBT |
7.3 |
(4.1) |
7.1 |
8.3 |
8.7 |
4.8% |
|
Profit before tax (post exceptionals and other) |
6.7 |
(4.8) |
6.6 |
7.9 |
7.9 |
0.0% |
|
EPS - diluted, adjusted (p) |
4.2 |
(2.2) |
4.0 |
4.6 |
4.7 |
2.6% |
|
Dividend per share (p) |
1.8 |
0.0 |
1.8 |
1.9 |
2.0 |
5.3% |
|
Underlying net cash/(debt) |
(29.2) |
(21.3) |
(15.8) |
(7.3) |
(16.1) |
120.5% |
|
Source: Epwin, Edison Investment Research
The Extrusion and Moulding (E&M) division increased revenue by 1.9% to £113.4m, benefiting from continued price inflation and surcharges to cover other cost inflation, and also included a £4.4m contribution to external sales from the Poly-Pure acquisition. Margins recovered from 7.2% to 9.3%, which is still modestly below the H119 figure of 9.8%, but comfortably ahead of the H121 and H122 margins of 6.6% and 7.2%, respectively, suggesting that management action to control costs and raise prices is having a continued and meaningful impact.
In Fabrication and Distribution (F&D), revenue was a shade lower at £66.6m (H122: £66.7m) with reduced volumes offset by price increases and a contribution of £2.9m from the 2022 Mayfield acquisition. The H1 margin reduced from 6.0% to 4.7%. In Fabrication, trade and social revenues increased 3% and 7%, respectively. The downstream distribution operations were particularly affected by macroeconomic factors and fiscal tightening. Weaker demand reduced volumes, but the group has been active via pricing to maintain returns from these markets.
Strategic progress being made on numerous fronts
For many years Epwin has followed a set of strategic targets that drive the development of the business and improve the revenue, profitability and ESG standing of the group. In 2023 and beyond, we believe Epwin will continue to evolve these strategic targets for the benefit of the business, its employees, the environment and investors. The targets and progress are summarised below.
■
Product and materials development: Epwin has been broadening its product portfolio and widening its technical capability. Its priority this year is to continue these trends and increase the use of recycled materials across the product range.
■
Operational leverage and efficiency: the company continues to target the utilisation of spare capacity and improved cost efficiencies. This includes the consolidation of the IT systems across the distribution business and the expansion of glass reinforced polyester moulding processes. The consolidation of decking production onto a single site is nearing completion.
■
Cross-selling and business development: Epwin targets the cross-selling of existing and new products to its customers via a range of channels and markets. It is currently focused on fully integrating the 2022 acquisitions to take full advantage of any opportunities presented.
■
Acquisitions: the company has made a number of acquisitions over the last 10 years to consolidate operations and markets and to broaden the product offering. The integration of recent acquisitions is ongoing and will also drive the increased use of recycled materials. Epwin remains active in the M&A market.
■
ESG: Epwin will continue to promote the sustainability credentials of its products, among other ESG targets. In 2023 and beyond it will refine its sustainability targets, seek to retain its Fair Tax Mark and progress its Taskforce for Climate Related Financial Disclosures reporting.
Epwin trades at a deep discount with a c 7% yield
Epwin trades on a P/E ratio of just 7.5x to December 2023, which is a material discount to its long-term average of 10.7x, suggesting potential upside. Furthermore, the company is acquisitive and has more than £50m of investment headroom on its balance sheet, which was discussed in our November 2022 note. This offers considerable potential for value-enhancing M&A activity. Furthermore, even without M&A, Epwin is cash generative; we expect debt to fall progressively over FY23–24 and note that the shares offer an attractive 6.7% yield from a dividend that is twice covered.
|
Exhibit 2: Epwin’s forward P/E ratio (x) |
|
|
Source: Refinitiv |
Exhibit 3: Financial summary
£m |
2019 |
2020 |
2021 |
2022 |
2023e |
2024e |
2025e |
||
Year end 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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Research: Healthcare
AFT Pharmaceuticals announced FDA approval for Maxigesic IV, an intravenous form of its flagship pain relief prescription medicine. The FDA approval of the post-operative pain alternative to opioids marks a material win for AFT, given the US is the largest analgesic market (estimated at nearly $7bn) and the current US regulatory hurdles in addressing pain in light of the opioid abuse epidemic. The launch at end FY24 or early FY25 is anticipated to trigger a US$6m milestone payment from Hikma Pharmaceuticals, the US licensee for Maxigesic IV. AFT’s 65% share of this milestone has the potential to provide upside to its NZ$22–24m FY24 operating profit guidance if Maxigesic IV is launched in FY24. We note that Maxigesic IV is already registered in 43 countries and is available in 21 countries (including key markets of Germany, France and Italy). The US approval is a key addition to the AFT portfolio, providing further confidence in the company’s ability to reach its previously stated near-term rolling 12-month stretch revenue target of NZ$200m, which we anticipate to be achieved on an annual basis by FY25.