Epwin’s H119 update reiterated existing guidance. Markets remain soft but business improvement activities, including new facility and product development investment, are ongoing and should be reflected in earnings improvement. The company remains conservatively funded and in a good position to continue to develop. An excellent dividend yield and modest rating at an earnings low represent good entry points for investors.
H119 revenue was marginally ahead y-o-y on a like-for-like basis (ie ex Amicus and PVS acquisitions, Cardiff site closure and discontinued glass operations). This is likely to reflect some pricing improvement and, implicitly, volume softness, in our view. Given previous restructuring actions, progress from window systems (we expect, including weak competitor effects) and acquisitions, H119 EBIT should exceed its prior year equivalent (this was originally reported as £7.1m, like for like; likely to be slightly higher stripping out the exited glass business). Interim gains would support our assertion that despite still weak UK markets, FY18 represented the trough earnings year for Epwin. At the end of H119, net debt to EBITDA is understood to have been c 1x, slightly above the year-end position after the c £3m acquisition consideration is paid.
A site purchase, construction and lease agreement for a new warehouse and finishing facility at Telford has been signed, which will consolidate four other small facilities nearer to existing extrusion and fabrication operations. In financial terms, this yields a one-off £8m cash benefit for Epwin, which we expect to be received prior to the year-end. This is now in our model; there is no FY19 P&L effect and we will adjust as necessary (ie interest benefit, lease costs) for future years when H119 results are announced. Epwin has also re-set its banking arrangements with an enlarged RCF of £65m (previously c £60m spread across an RCF, term loan and accordion) and an overdraft facility of £10m (previously £5m) to 2022. This happened earlier than strictly required but simplifies Epwin’s financing structure.
Epwin’s share price is back to levels seen at the beginning of the year following a c 13% decline since the beginning of June. (In contrast the FTSE All Share Index is up c 9% ytd.) As a result, the FY19 P/E of 7.3x and prospective dividend yield of 6.8% should appeal to value and income-focused investors alike. We acknowledge soft and uncertain markets but internal actions are driving our expectations of progress.