Market challenges have been well documented and mostly negotiated thus far by Epwin. Management has elected to take action to reduce costs and capacity in the light of ongoing market conditions. We expect more detail with the release of H117 results on 13 September. Epwin remains in robust financial health and in our view, is in a position to sustain its dividend – currently yielding c 10%.
Management notes H117 trading was in line with its expectations in generally tough RMI markets and considers that – save for two market specific events (see below) – the FY17 outturn is now likely to be modestly below previous guidance. No specific divisional trading details are given, though materials price inflation is referenced again and we note that the shortage of some additives has led to PVC pricing continuing to nudge up latterly. We suspect that some caution on further price rises in a pretty flat end market is behind the change to underlying expectations. Group net debt appears to have followed its usual seasonal pattern with a H1 working capital increase (with an expected H2 unwind to come). We anticipate that the end-June figure will have been at or below the end-H116 level (ie c £30m). No other H1 financial guidance was provided.
Epwin highlights two recent corporate customer events: a distressed, strategic review position; and a disposal to a competitor (we believe these to be Entu and SIG Building Plastics, respectively). There is clearly downside risk to future revenue – in a number of business lines – with these customers that in aggregate represent c 10% of revenue; we consider that normal trading terms are unlikely to change in the near term in the busiest trading period for companies in this space. Market conditions have, however, been the stimulus for actions being taken to reduce costs and capacity within the group. Neither these nor the benefits have been quantified at this stage. We have elected to reduce earnings by 8-9% across each of our forecast years, pending further clarification with the H117 results.
Based on our new estimates, Epwin’s FY17 P/E and EV/EBITDA multiples are now 5.3x and 3.5x respectively. The dividend payout remains a healthy attraction although we have tweaked down our expected rate of DPS progress in the light of earnings revisions. Nevertheless, a solid yield of c 10% is projected for FY17.