Epwin Group plc (LON:EPWN) 2017 has been a difficult year for the light side building products industry with the RMI market having remained lacklustre, Social Housing coming off a low base and only the smaller New Build market seeing growth. Against this backdrop, and recent warnings from peers, Epwin has confirmed that it is confident of meeting FY17 expectations. In addition, it has announced the disposal of Indigo Products to the new owner of Entu (UK) along with a three-year exclusive supply agreement for extruded plastic products. This is a positive announcement bringing to a close the main issues the insolvency of Entu (UK) raised for Epwin. There is no change to forecasts as the impact from these developments had been assumed at the time of the interims in September. ZC forecasts assume PBT of £21.3m in FY17 followed by £19.0m in FY18. Today’s statement provides greater certainty in both forecasts and leaves the shares trading on 7.2x FY18 earnings and yielding 8.5%.
Customer risk reducing as management team execute in line with expectations – Epwin has announced the sale of Indigo Products Limited to Indigo Acquisitions Limited. The business principally supplied Entu (UK) and the consideration of £1 reflects the trading performance of the business, in the ten months to the end of October it generated revenue of £12.6m and a loss before tax of £2.7m, after accounting for the Entu (UK) debt write off. The disposal ends the sale of fabricated windows by Epwin to the former Entu (UK) business. As part of the transaction Epwin has agreed an exclusive three-year supply agreement for extruded plastic product which should allow Epwin to retain their profile supply to these businesses under their new ownership.
Important step strategically – The changes to forecasts in September were based on a realistic assessment of the potential for Epwin to cope with the commercial issues it faced from its two largest customers and the significant raw material price inflation caused by recent exchange rate movements. Today’s developments highlight management’s ability to execute and offers increased options with regards the on-going appraisal of the fabrication division and any further actions to restructure that side of the business.
Strong cashflow – Epwin will generate c. £10.0m of free cash flow increasing to £14.0m in FY19. This against cash dividend payments of c. £9.5m offering 1.1x to 1.5x cover in both years. The business has low levels of gearing, c. £20.0m (0.8x EBITDA), generating finance costs of c.£1.0m annually meaning leverage risk is low.
Zeus Valuation – The current share price of c. 78p for Epwin Group Plc is discounting a great deal of the issues faced by the business in 2017. Today’s announcement increases the certainty in forecasts and leaves the shares trading on 7.2x FY18 earnings and yielding 8.5%.
