Epwin Group plc (LON:EPWN) has released a brief update this morning indicating that trading in the first half of the year has been in line with expectations (Zeus Capital full year forecast £278.6m revenue and PBT of £18.2m). This follows the in-line update provided on May 22nd at the time of the AGM. Whilst encouraging in the short term, the operating environment remains difficult. The UK RMI market appears to have deteriorated with industry participants suggesting it is down yoy in the first six months of FY18 with the window and door market being particularly challenging. Exacerbating the situation is cost input inflation resulting in margin pressures across the industry as the scope for price increases is limited by the weak market backdrop in the RMI sector. Epwin is not immune from these pressures so today’s reiteration of guidance for FY18 is welcome after seven months of the year. The shares current valuation of 6.7x earnings, 4.6x EV/EBITDA and yield of 7.4% reflects the difficult operating environment and the customer issues experienced last year. The balance sheet remains conservatively geared with net debt of less than 1.0x.
No change to FY18 forecasts despite weather, cost input pressures and weak market backdrop: The adverse weather experienced in the early months of the year has proved a material headwind with many of Epwin’s peers in the construction, housebuilding and building product sectors highlighting its impact in recent updates. This has been exacerbated by continued cost input pressures and a weak consumer environment in the UK. The RMI market is estimated to have declined yoy in the first half of 2018 with some commentators suggesting that the window and door market is down by c. 5%. The New Build Housing market generally remains the bright spot for the industry. With its high exposure to the RMI sector, that Epwin has reiterated guidance for the current year should be viewed positively.
Current year forecasts: Zeus Capital forecast revenue of £278.6m a 6.6% decline on the £298.3m in FY17. This has been driven by the customer issues last year. The impact to operating profit forecasts has been exacerbated by cost input pressures. Management did a good job of mitigating the extent of these last year recovering c.£5.0m of the £7.6m cost headwind, through a combination of price increases and operational efficiencies. FY18 estimates assume a further 50bp reduction in margins to 7.0%. This results in FY18 PBT forecast of £18.2m. The outlook for FY19 and FY20 remains difficult but with operational efficiencies continuing to come through.
Valuation: The shares trade on 6.7x current year earnings and yield 7.4% with the balance sheet remaining lowly geared, with less than 1.0x EBITDA to net debt. At the current level of 71.1p they offer value and limited leverage risk for those investors prepared to wait for an improvement in the cycle.
