Zeus Capital Equity Research Director Andy Hanson caught up with DirectorsTalk for an exclusive interview to discuss Epwin Group PLC (LON:EPWN)
Q1: Epwin Group announced their final results for 2016, I guess the question is, are the results any good?
A1: The results for 2016 have been really really good actually, I think you need to put it in context of a backdrop of the RMI market, it hasn’t really grown during the year. Epwin did a couple of good acquisitions at the tail end of 2015 and also an acquisition in June 2016 and the acquisitions have really driven the performance of the business during the year. So, revenue growth was 15% coming in at £293 million, up on the £256 million reported in 2015, it’s a good top line growth driven by the acquisitions, as I say, and again, against that market backdrop which showed flat growth year on year. In addition to the good top line growth, management improved operating margins by 80 basis points, they can operate in margins for 8.7% so you’ve got some operational gearing coming through as well, therefore, growth in profit before tax of 25% for the year. So, in summary, 2016 looked like a really good performance.
Q2: So, what’s the outlook for the company looking like?
A2: As I said, the RMI market was flat in 2016 and we’ve had industry data recently and it looks like it might be deteriorating slightly during 2017 and 2018, the end markets aren’t’ supportive which means we have cut our numbers slightly for 2017 and 2018, we’ve taken 5% off the top line, which results in about a 6% downgrade to profit. Having said that, it really is two things, it’s tough end markets, as I say, it’s also cost pressures that are coming through from the weakness of sterling and there’s also operational issues with one of their businesses, fabrications. So, we’ve taken quite a conservative view of the business going forward but even so, I’d compare it to other companies in the sector, the likes of Travis Perkins, have much much larger downgrades than what we’re reporting for Epwin Group today.
Q3: So, how would you sum up the performance of the business?
A3: I think you need to put it in context of what the business has done since it listed. So, it came to market in Summer 2014 and, basically, since then the end markets have been broadly flat, as I say the RMI market has been very very sluggish. When I look at what the business has done from my initial forecast back in 2015, the actual results that they’ve generated in 2016 have been 25% better than my initial forecast so the actual performance has been very good.
Q4: Now, I think you’ve touched on this but what effect does all this have on the valuation for Epwin Group?
A4: The market already looks to be discounting the downgrade because the shares are trading on 7.5 times. So, 7.5 times lowered earnings in full year ’17, it looks very very cheap and against the sector, I think that’s about a 40% discount on a price earnings basis so to me it looks like the market’s overreacted ahead of this statement thinking that there will be downgrades. I think our new forecasts are very conservative and unless we see a substantial cyclical decline in end markets, I’m very comfortable with where I am on forecasts and I think Epwin Group will at least meet them, and should they do acquisitions, potentially beat them. So, that 7.5 times earnings look very attractive, on top of that you’ve got a yield of just over 6% which is well covered on both an earnings and a cash basis so low earnings multiple and very high dividend yield which is very well covered, I think if you’re patient you’ll get a very nice return to Epwin shares over the next 2 or 3 years.
