Epwin Group — Strategic progress in tough markets

Epwin Group (AIM: EPWN)

Last close As at 23/05/2024

GBP0.90

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Market capitalisation

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Research: Industrials

Epwin Group — Strategic progress in tough markets

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.

Andy Murphy

Written by

Andy Murphy

Director, Financials & Industrials

Industrials

Epwin Group

Strategic progress in tough markets

H123 results

Construction and materials

19 October 2023

Price

66.50p

Market cap

£96m

Net debt (£m) at 30 June 2023

16.1

Shares in issue

144.9m

Free float

67%

Code

EPWN

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.4)

(1.5)

(11.4)

Rel (local)

(2.8)

(2.0)

(17.8)

52-week high/low

81.50p

66.00p

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

FY trading update

January 2024

FY23 prelims

April 2024

Analyst

Andy Murphy

+44 (0)20 3077 5700

Epwin Group is a research client of Edison Investment Research Limited

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*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

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

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.

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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.

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AFT Pharmaceuticals — FDA nod for opioid alternative, upside anticipated

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.

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