Trading in the first four months of FY17 has been in line with management expectations and our estimates are unchanged. Market commentary is cautious, but as outlined in our recent note Epwin has a number of internal initiatives underway to further improve the business and mitigate near-term input cost pressures. In our view, longer-term prospects are somewhat better than the current rating is implying.
For the UK building materials sector, Q2, Q3 and into Q4 are the busiest periods, but it is encouraging to know that the first four months of Epwin’s trading year have met management expectations. Industry-wide materials input cost rises have been flagged previously and there appears to be no additional caution in this area. In flat RMI markets, Epwin is focusing on operational improvements (eg in fabrication) and marketing initiatives (eg branding and range development of window systems and canopy products plus greater co-ordination across group companies). H117 will benefit from an extra five months of National Plastics trading and we expect Fabrication & Distribution to show a more robust y-o-y performance. We will take a view on the likely shape and quantum of H117 results at the end of the half year.
Recent comments from adjacent companies (ie Eurocell, Safestyle, Tyman and Titon Holdings) have shown some variability reflecting respective sector exposures. From a general industry perspective, new housebuilding demand appears to be robust, while retail has clearly slowed recently. After taking soundings across the door and window supply chain, we believe that the broad expectation is for flat trade volumes and improved pricing in FY17 reflecting a pass through of higher input prices. Our underlying Epwin model is consistent with this, supplemented by the full year effects of National Plastics. As noted above, building products suppliers exhibit a calendar H2 weighting; Q316 contained some softness so we believe that a flat volume expectation is a reasonable expectation for 2017 overall.
Epwin’s share price has eased back from FY17 highs of 128.5p but has still outperformed the FTSE All-Share Index by c 16% ytd. Notwithstanding this, it is currently slightly below year ago levels. Valuation multiples are little changed from our last note, being a P/E of 8.7x and EV/EBITDA of 5.6x for this year with a prospective 5.5% dividend yield. While market caution has been expressed, we feel that this has been overly discounted at current share price levels.