Epwin Group Plc (LON:EPWN) has announced a trading update confirming that FY17 results will be in line with expectations, ZC forecast £293.5m revenue and £21.3m Profit Before Tax. That trading has remained in line indicates that the customer issues raised in September are developing as expected, helped by the disposal announced in December, and importantly the operating environment has not deteriorated. Our view remains that the industry outlook for 2018 is difficult with the UK consumer likely to remain under pressure limiting any sustained recovery in the RMI market. Against this backdrop, and unlike many in the sector, forecasts for Epwin realistically assume a deterioration yoy. On FY18 forecasts the shares are trading on a PER of 7.2x and the yield of 8.6% is 1.6x covered by earnings. The inherent value in the business is highlighted by a price to book of 1.2x and with low levels of gearing, net debt to EBITDA is 0.7x, leverage risk is low.
2017 has been a difficult year for the building products industry with weakness in UK RMI markets exacerbated by cost pressures – Confirmation that Epwin’s FY17 results are in line suggests the outcome will be similar to ZC forecasts that assume broadly flat revenue. Profitability declines yoy, stemming from a forecast 100bp decline in EBITA margins. This has been driven by significant, in some instances double digit, cost input increases that have been exacerbated by currency movements. The impact on operating margins has been felt across the industry with stagnant demand limiting the ability to pass cost through to the consumer. Inflationary cost pressures should ease during FY18 but with the UK consumer expected to continue to be under pressure, the UK RMI market is likely to remain difficult limiting the industry’s ability to increase prices.
Strategically important divestment decision taken – The difficult trading conditions faced coincided with issues faced at Epwin’s two largest customers. One was acquired whilst the other went into administration. As a result of the administration Epwin announced the sale of Indigo Products (19th December). Indigo predominantly fabricated window frames to the customer that went in administration and was sold to the new owner of that business. In conjunction with the sale a new three-year supply agreement for extruded product was agreed. The sale is important strategically as it increases management’s options with the regards the fabrication business and adds to the potential of operational improvements being undertaken.
Valuation – The industry outlook for FY18 and beyond is difficult suggesting estimates remain at risk across the sector. Earnings forecasts for Epwin already assume a decline before an anticipated recovery in FY19. On FY18 estimates the shares trade on 7.2x earnings and yield 8.6%. With debt below 1.0x and good cash generation leverage risk is low.