Epwin Group Plc (LON:EPWN) FY18 trading update states that revenue and underlying operating profit are within the range of market expectations, as is net debt. Despite revisions to expectations, forecasts remained heavily H2 weighted in anticipation of a positive impact from price increases and operational efficiencies. That these have come through, albeit in a more limited way than we had expected, is a positive. The operational efficiencies made over the last 18 to 24 months, and those continuing to be implemented, will help underpin margins and reduce operating costs in an environment that looks as if it will not do the industry any favours in the short term. Cost headwinds, an uncertain macro outlook and a subdued RMI market continue to pose significant earnings risks across the building product space in FY19. In a sector that is cyclically depressed Epwin continues to stand out, trading on 6.9x FY19 earnings.
2018 has been a difficult year with subdued demand and continuing raw material price increases impacting profitability: The Management has worked hard during the year to implement cost synergies through site consolidations, total site exits and a general rationalisation programme across the Group. The rationalisation programme is on-going, post the period end the glass sealed unit manufacturing operations were disposed of for £0.1m. The operations were loss making as demand for the product had waned and over capacity in the market weighted on pricing.
Results in line with ZC, and consensus, expectations and the balance sheet remains unstretched: Following the revision to ZC forecasts, in mid-December, consensus expectations are for revenue of £287.3m (ZC £285.2m) adj. EBIT of £18.4m (ZC £18.3m) and PBT of £17.2m (ZC £16.9m). Net debt at year end is sub 1.0x Adj. EBITDA, indicating the ZC estimate of £25.9m is broadly correct, which is undemanding.
Uncertain outlook weighing on sector valuations: Valuations across the building products sector reflect where we are in the cycle with weak end demand exacerbated by cost pressures. Epwin’s current valuation of 6.9x FY19 earnings reflects this more than most. A period of improved earnings visibility could see the shares re-rate quickly.