Epwin is investing in both divisions and this organic development strategy was complemented by two acquisitions in FY15. In this way, management is building business momentum despite flat markets and this should become increasingly apparent in FY16. As it does so, we see scope for a re-rating based on the delivery of strong earnings progress.
FY15 was a mixed year for Epwin both in terms of market conditions and divisional performance. Extrusion & Moulding (E&M) saw strong progress in H1 but this did not really follow through over and above seasonal effects in H2, while Fabrication & Distribution recovered from weak H1 trading to deliver improved profitability in the second half. The acquisitions of Stormking and Vannplastic in the year, for a combined initial consideration of £32.2m (in a mixture of cash and shares), broaden E&M’s product offering and should make a material contribution to both divisional and group profitability. Epwin’s end FY15 £14.4m net debt position was influenced by these deals, but also saw good underlying cash flow.
At the time of reporting FY15 results, management commented that trading in the new financial year had been in line with its expectations, albeit in still subdued market conditions. Nevertheless progress is anticipated this year, driven by already announced acquisitions and organic investment and business improvement initiatives. Our unchanged PBT and EPS estimates show year-on-year increases of 26% and 18% respectively for FY16, followed by smaller incremental gains in the next two years. We share the company’s view that there is pent up demand in UK residential RMI spending and while this may not come through in the form of a sharp upward spike, it should underpin prospects in the medium term.
Epwin’s share price responded well to the Stormking acquisition announcement in January, but has settled back at 132p currently and is up c 4% ytd. Including the full year effects of the two FY15 acquisitions results in a P/E multiple below 10x for FY16 with a growing dividend yield, approaching 5%. We acknowledge that underlying markets have a broadly flat outlook in the near term, but business momentum is building, evidenced by those acquisitions and ongoing investment intentions. The balance of newsflow is likely to remain positive and support a higher share price in our view.