As indicated in recent Epwin Group plc (LON:EPWN) trading statements (19th Dec and 8th Feb) FY17 results are in line with expectations. Revenue of £298.3m (FY16: £293.2m) is +1.7% YoY and 1.6% ahead of ZC. Gross margin declined 120bps to 30.4% due to cost input pressures resulting in adj. operating profit of £22.3m, a decline of c.13% YoY but in line with ZC estimate. Adj. PBT declined 14.5% to £21.1m resulting in adj. EPS of 12.3p, in line with ZC estimates. In the short term the industry outlook remains difficult and whilst today’s statement indicates trading in the early part of FY18 has been as expected, we trim profit expectations by c.4% to £18.2m (prev. £19.0m). A proposed final dividend of 4.6p takes the FY17 total to 6.7p, in line with ZC forecasts. The valuation of 7.5x FY18 earnings and 4.9x EV/EBITDA already appears to be discounting a great deal of negative news and even on the rebased dividend the shares yield a prospective 6.5%.
FY17 results reflect a difficult year: Epwin has faced several headwinds during the year. Input cost pressures have impacted the building products industry generally resulting in margin compression, exacerbated by a subdued RMI market in the UK. Despite a weaker market backdrop, Epwin grew sales by 1.8% YoY implying market share gains on the back of the new Optima 22 profile and decking. Raw material costs rose by c.£7.0m on a LFL basis, driven by sterling weakness and disruption as a result of specific customer issues. Despite efficiency savings and price increases this led to a 120 basis-point decrease in operating margin resulting in a 13% decline in profit YoY.
FY18 outlook: Today’s results state that FY18 has started in line with expectations. However, considering recent statements from peers in the industry we take the opportunity to trim forecasts. Revenue assumptions are broadly stable in both FY18 and FY19 but profit forecasts decline by c. 4% and c. 3% respectively as we factor in the continued difficult operating environment, limiting price and volume increases, and cost input pressures.
Restatement of dividend policy looks sensible: Management has announced that going forward it will target approximately 2.0x adj. earnings cover allowing the business to continue to invest in broadening the product portfolio whilst maintaining an attractive distribution policy. This looks sensible when considering the positive impact investment will make through the cycle. The new ZC forecast assumes 5.2p of dividend in FY18 (prev. 6.7p).
Valuation: The current share price reflects the difficult operating environment and issues with the two largest customers. Trading on 7.5x current year earnings and yielding 6.5%, on the rebased dividend, with less than 1.0x EBITDA to net debt the shares offer value and limited leverage risk for those investors prepared to wait for an improvement in the cycle.
