Epwin Group PLC (LON:EPWN) year-end trading update states that results are in line with expectations which we take to be in line with consensus PBT forecasts of £24.4m, marginally above our £24.3m estimate. We would highlight that forecasts increased at the time of interim results (14th September) on the back of the acquisition of National Plastics. That FY results are in line with consensus expectations is reassuring, particularly as we have seen several high profile profit warnings from the sector on the back of cost input pressures and the RMI market remaining moribund. We leave FY17 and FY18 forecasts unchanged following today’s statement. Since listing (July 2014), Epwin has executed on its stated strategy of growing the business through acquisition, maintaining a progressive dividend policy and driving through efficiencies in the business. Despite executing in a difficult market the valuation looks anomalous, with the FY17 PER multiple of 6.7x almost at the same level as the prospective yield of 6.6%.
A good performance in FY16 underpinned by acquisitions – Assuming FY16 revenue and PBT are broadly in line with ZC forecasts, yoy revenue grew c. 18% in H2 and c.17% for FY16 driven by the acquisitions of Stormking and Ecodek in the last two months of 2015. The good performance of the acquisitions highlights the quality of the businesses acquired and provides confidence that further deals will add to overall business. Our FY16 forecasts assume group operating margins of c.8.6% which are c.70bps ahead yoy due to the progression in the Extrusion business more than offsetting the continuing underperformance in Fabrication. In terms of profitability, Epwin will have grown by c.24%, underpinned by the acquisitions, while the RMI market, its largest end market at c. 65% of revenue, has been broadly flat.
Conservative forecasts but headwinds in FY17 – Over the last 24 months management has been consistent with its assertion that markets will remain difficult with no material rebound in RMI. This has been reflected in forecasts that have been realistic and meant the business has consistently delivered on expectations. FY17 forecasts assume 6.2% revenue growth, 3.1% organic, equating to 8% profit growth. With cost input pressures increasing and an uncertain economic outlook in FY17 we remain cognisant that the business does face headwinds. However, Epwin remains better placed than many of its peers to mitigate these headwinds and can undertake accretive acquisitions with net debt of just 0.6x EBITDA.
Valuation – The prospective yield of 6.6% is in line with the FY17 PER multiple of 6.7x. Despite potential headwinds, the rating discounts a significant amount of earnings risk which we do not currently see and ignores Epwin’s history of meeting expectations.