Since the easing of lockdown restrictions, Epwin has seen stronger demand than had been expected. As a result, ZC reintroduces forecasts for FY20 and FY21 based on guidance provided by the Company. This includes a small dividend estimate of 1.0p for FY20 increasing to 2.2p in FY21, it is assumed the 50% pay-out ratio target is reintroduced. Despite seeing an almost 100% closure of the business, and therefore revenue, over an eight-week period, Epwin has not needed to raise additional equity or asked its lenders for covenant waivers. This is in stark contrast to many of its peers in the building product space and is testament to the strong financial management of the business. Our assumption that volumes will be 15% down in FY21, relative to FY19, looks conservative and puts the shares on a recovery rating of c. 17x with a dividend that will grow in line with earnings.
Companies: Epwin Group PLC
Building on previous updates – and having reopened all facilities – Epwin has confirmed that it has seen demand levels rebuilding following COVID-19 disruption during H1. In particular, sales in the replacement market have exceeded their prior year equivalents in the latest two trading months. Net debt dipped at the period end, further boosting liquidity headroom. The near-term focus is on delivering increased customer requirements and full commissioning of the new Telford warehouse facility. Our estimates remain suspended currently.
RMI demand, c. 75% of Epwin’s revenue, has been stronger than expected since the recommencement of operations. Extrusions revenue in June and July were up +10% yoy. The New build and Social markets have been slower to return but have picked up pace in early August. Working capital build up has been well managed, net debt is down £10.0m to c. £21.0m, since March. The strength in Epwin’s end markets mirrors what other companies in the sector have experienced recently. It implies that the positive dynamic seen is more than just catch up in demand and might be a structural shift in consumer behaviour. As a result, FY20 performance will be materially better than might have been feared back in March. It remains too early to predict the longevity of the trend and guidance remains withdrawn, but with visibility steadily improving it can be hoped that it might be reintroduced in the coming weeks.
Epwin is a professionally managed, well invested business with market leading share and operational improvements driving future returns. The balance sheet is robust with net debt not exceeding c. 1.0x normalised EBITDA during lockdown and the business will not need additional funding. On historic numbers, the shares are trading on just 6.8x earnings.
Companies: Epwin Group Plc
Following a temporary shutdown of facilities at the end of March, Epwin has been reversing this process which is expected to complete in the next week with all main sites operational by then. The next phase will depend on the rate at which demand returns in the company’s product space. Previously announced actions have contributed to a stable funding picture with core net debt at the end of April – the first full month of the coronavirus impact – unchanged from the end of March. Our estimates remain suspended for now.
Epwin has announced that its manufacturing and distribution sites have restarted operations over the last few weeks with all main operating sites open by the end of this week. This is in line with other building product manufacturers, merchants and construction businesses. Demand has steadily begun to pick up as construction sites have started to return and, whilst it is still early days, should continue to increase as lockdown restrictions continue to be eased. Epwin will cautiously ramp operations to meet enhanced levels of demand. Cash management within the business has been good with funding headroom remaining at c. £45.0m, in line with the level announced at the end of March. Epwin remains well placed to weather the current environment better than most other building product companies, having managed its balance sheet conservatively. The restarting of operations is a welcome step towards normality and will hopefully lead to the restatement of guidance over the coming weeks.
Epwin Group's FY19 results matched latest guidance and showed business resilience against weaker trading conditions towards the period end. The temporary operational shutdown in place since the end of March is ongoing and cash management continues to be a top priority pending an easing of UK government guidelines and business restarting. Our estimates have been withdrawn as has all management forward guidance.
Headline FY19 results had been well flagged in the COVID-19 update in late March (25th) but today’s results provide detail on the operational improvements, in terms of both efficiency savings and the enhancement of the commercial offering. It also highlights that Epwin is well positioned to weather the current impact from COVID-19 and will remain within its banking facilities, even under the most pessimistic scenario modelling. ZC leaves FY20 and FY21 forecasts unchanged, effectively on a pre COVID-19 basis, until there is greater clarity on when ‘lockdown’ will end and the phasing of the UK economy restarting.
The coronavirus outbreak has led to widespread temporary closures across the UK building materials supply chain and Epwin has taken similar steps. We have brought our FY19 estimates in line with management’s update comments. Clearly, there will be downward pressure on trading for a currently indeterminate period and, it is important to note that estimates beyond FY19 are yet to be adjusted for COVID-19 impacts.
Epwin has announced that it will implement a controlled shut down of its operating facilities for a temporary period in response to the anticipated reduction in demand. FY19 results, that had been scheduled to be released on the 2nd April, will now also be delayed as per guidance from the FCA that has been supported by the QCA. This is in line with many other companies. Epwin benefits from a strong balance sheet that has significant headroom and will come through this difficult period in a strong position relative to competitors that have much weaker balance sheets. Frustratingly trading in the new year had started well and was ahead of budget.
ZC FY19 forecasts were compiled in December 2018 and assumed that cost input pressures would abate, Epwin would win market share and the underlying trading environment would remain solid. The first two assertions have proved correct but trading conditions in the second half of FY19 proved increasingly challenging for the sector. The extension of Brexit lead to an extenuated period of political uncertainty and a deteriorating macroeconomic backdrop. Put in this context, a flat performance in profitability from Epwin is credible. Because of the trading back drop, ZC estimates are moved back in line with consensus. The rally in the shares since December is warranted on the much-improved level of gearing, attractive 5% yield and steadily improving outlook. Despite this appreciation the shares remain at a substantial discount to peers.
Underlying operating profit (pre IFRS 16) of £8.3m is 11% ahead of the £7.5m reported in HY18 as margin improved 60bps to 5.9%. FY19 expectations of £20.1m are predicated on a £1.4m yoy improvement with the business having delivered £0.8m in H1. Further cost recovery, positive volume expectations and additional efficiency improvements in H2 mean that confidence in achieving FY19 estimates is increasing. Despite the UK RMI market remaining difficult, Epwin should continue to outperform in terms of market share and, having weathered material cost headwinds, has an opportunity to rebuild margin back towards the double digit achieved at the EBITDA level historically (pre IFRS 16). We leave forecasts unchanged but with increased confidence in achieving the FY19 estimates.
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.
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The Group has issued a trading update ahead of its interim results due on 12th November 2020. Overall, the first half has seen a strong recovery in activity and the Board now expects to report H1 revenues and operating profit of at least $200m and $20m respectively. This is materially ahead of market expectations and with a high degree of visibility through Q3 FY2021E we are upgrading our operating profit forecasts by 39% and 25% for FY2021E and FY2022E respectively. The Group is seeing strong growth in EV charging cables and bespoke high-performance cabling solutions, and consumer electronics demand has also remained robust. Together with investment in automation and cost efficiencies, the Group operating margin is now 10%, which is a testament to management’s operational and strategic focus. The shares trade on an FY2021E EV/sales multiple of 0.9x which compares to a sector based multiple of c.1.2x for companies with comparable operating margins and growth.
Companies: Volex plc
Judges Scientific is focused on acquiring and developing companies in the scientific instrument sector. The acquisition of Korvus Technology, a UK-based but global supplier of vapour deposition systems, largely to academic institutions, marks Judges' third deal in less than 12 months. With Korvus generating revenues of £1.42m and adj. EBIT of £0.66m (46% margin), we choose to leave our FY2020E estimates unchanged but, after financing costs (all-cash initial consideration of £2.64m), we see a 3.5% uplift to FY2021E with our adjusted PBT increasing to £15.2m. Although a trading update is not provided this morning, we remain cautiously optimistic with respect to FY2020E. COVID-related business risks / restrictions remain; however the relative strength of H1:2020 (albeit at some expense to the order book) continues to provide some comfort, in our view.
Companies: Judges Scientific plc
We have today released a new note on The Ince Group plc - this is the first of a series of "explainer notes" that take an in-depth look at the various aspects of the Ince investment case our investors have told us require more clarification. This edition examines the partner remuneration model - the headline for which is that this isn't discretionary bonus, it's more of a revenue share that partners are given in lieu of pay. Thus their remuneration is entirely variable, rather than representing a fixed cost.
Companies: Ince Group plc
TP Group (TPG) delivered robust organic growth of 13% during H1/20A. However, the impact of COVID-19, together with increased investment and a shift in business mix, meant that Adj EBITDA reduced by £0.9m YoY to £1.4m. TPG has today announced it is in advanced discussions to dispose of its non-core oil and gas focused engineering business. Despite the strong and expanding order book, COVID-19 continues to create uncertainty around the timing of contract deliveries. As such, our forecasts remain withdrawn and our rating Under Review.
Companies: TP Group Plc
An explicit and substantially positive update from Norcros points to a strong Q2 trading recovery after a COVID-19 affected Q1 and a significant reduction in net debt to modest levels. The company’s portfolio of businesses have demonstrated resilience and agility in being able to respond to these variable demand conditions and in doing so have probably enhanced the group’s competitive position. Our estimates remain suspended ahead of the H121 results announcement on 12 November.
Companies: Norcros plc
Checkit has deepened its relationship with John Lewis, by signing a three year framework agreement with this existing customer. This provides all John Lewis shops with the opportunity to benefit from Checkit’s three proprietary software products: Connected Workflow Management (CWM), Connected Automated Monitoring (CAM) and Connected Building Management (CBM). Out of these three, it is CWM which is a new service offering for John Lewis. We find this product particularly interesting given the broad number of (previously manual and paper-based) operational workflows the platform can automate - increasing efficiency. Additionally - through Checkit’s cloud-based dashboard – managers can track tasks in real-time and also respond to critical issues. Lastly, analytical tools can be used to spot operational weaknesses or non-compliance. This contract therefore provides further validation of these products and how they are resonating with large enterprises, as they look to drive greater efficiency within their organisations. This news follows-on from us recently reinstating forecasts. For FYJan21, we’re looking for £13.1m of sales i.e. modest LFL growth (PY pro-forma: £12.8m), within this though, expect to see strong ‘recurring‘ growth – driven by contracts such as this. Should also see decent progress on profitability (FY21E EBITDA: £-2.0m) indeed such progress was highlighted in H1, as cash-burn fell to £-1.4m
Companies: Checkit plc
Following hot on the heels of last week’s significant project award for Siemens and London Underground, the group has announced a further significant project award for Alstom’s high-profile next generation of TGV trains for SNCF. While the value of the project has not been announced, it reinforces our optimism and view that momentum in the train market is improving and also further strengthens the group’s medium-term order book. We see the award as noteworthy also because it is in the group’s innovative electronics technology, validating the group’s product investment in this area.
Companies: LPA Group Plc
Symphony Environmental develops and sells innovative products and additives which make plastics and rubber smarter. The core d2w oxo-biodegradable product facilitates rapid and safe transformation of plastics into harmless biodegradable compounds. The newer d2p product is a protective technology which has many applications. The most commercially advanced prevents microbial growth on plastics, useful in food and non-food settings. This market is estimated to be worth $30bn globally and growing rapidly. Recent news has been positive. The Group has just announced that Turkey’s Uno Bakery will use oxo-biodegradeable d2w for its packaging. This follows a recent strengthening of the strategic partnership on d2w packaging with the world's largest bakery, Groupo Bimbo. In late September, in the UK, AGS Airports, which operates Aberdeen, Glasgow and Southampton airports has become the first UK company to trial a new d2w 100ml security bag. Further, Brazilian supermarket chain, Cotripal, has introduced an innovative combined d2w and d2p (antimicrobial) carrier bag. No financials for these announcements have been disclosed; we assume for the moment these are not material in the context of the Group. But the potential over the next few years is significant, in our view. Commercialisation is gathering momentum. Our valuation for SYM is 35p per share, indicating 30% potential upside.
Companies: Symphony Environmental Technologies plc
Velocys has shown real progress in the first half of FY 20 and done this while significantly reducing costs. This reflects the company’s move to a more efficient development strategy focused on demonstration projects followed by a licencing and royalty model. We see the interim numbers and achievements as evidence of this strategy paying off and we think it leaves the company well placed to maximise development going forward.
Companies: Velocys plc
Directa Plus has provided an update on trading following the acquisition of 51% of Setcar in November 2019, where it notes the business is delivering significantly improved results compared to previous years, despite the headwinds caused by the Covid-19 pandemic. 132 new contracts have been signed since 1 January 2020 and it has participated in 77 tenders for new business, of which 32 were awarded to Setcar, with a further 9 still under evaluation by the potential customers.
Sales for the period 1 January 2020 to 1 October 2020 increased to €3.0m representing growth of 15% on the €2.6m achieved in the equivalent period in 2019. The contracted order book is expected to generate revenue of €4.0m during 2021 and €3.0m during 2022. It also notes the acquisition integration continues to progress well and it is investing to reshape the company to ensure better growth opportunities.
Companies: Directa Plus Plc
The company has announced a prestigious contract award, to supply interior lighting and door lighting to Siemens, for the London Underground Piccadilly Line. The award for an initial 94 train sets, with a further option for 216 sets across other London Underground lines. This is an important contract for LPA and helps cement an existing strong relationship with the leading European train manufacturer. The group has announced a number of contract awards through 2020, pointing to accelerating market momentum in this area, and today’s announcement further reinforces the medium-term order book. While forecasts remain under review, we expect a year-end trading update shortly.
Renewi’s operations are at the heart of the circular economy that collects, processes and converts waste into usable secondary materials to reduce the use of primary resources and to lower carbon emissions. The company has recently entered a new strategic phase with a clear roadmap to deliver a substantial increase in group profitability. Consequently, Renewi offers investors an environmentally friendly above-average earnings growth opportunity.
Companies: Renewi Plc
Seeing Machines has announced that it is formally expanding its leading automotive driver monitoring system (DMS) into an overall vehicle interior/occupant monitoring system (OMS). The expanded offering will be available for automotive production programmes starting as early as 2023. Seeing Machines estimates that its entry into OMS opens an incremental market opportunity, worth up to a total of A$1.5bn through to 2030, with an estimated incremental revenue opportunity for the company exceeding A$350m. The introduction of OMS with a wide field of view camera will also continue to support even the most challenging Euro NCAP DMS and semi-automated driving requirements, which has traditionally been achieved with a narrow view (driver exclusive) camera system. Combined with the Seeing Machines's Occula® Neural Processing Unit (NPU) technology, Seeing Machines allows both DMS and OMS to be offered through a single field of view interior camera system with little increase in camera, illumination, or embedded processing cost.
Companies: Seeing Machines Limited
The Group has delivered an FY2020 adjusted operating profit performance that is modestly ahead of our expectation and strong cash generation, with net cash of $32m, excluding $10.9m of IFRS16 lease liabilities. The business has benefited from its diverse customer base, products and operating geographies, and exposure to medical devices, EV charge cables and high speed datacentre products. Good progress has also been made with operational efficiencies, lowering product costs and with selective acquisitions. Whilst revenues in the 4 months to May 2020 are up 4% to $126.2m on the comparable period, the Group is seeing weakness, primarily in medical equipment installations and delays in the EV sector. With a broader range of potential outturns in FY2021E, the Group has withdrawn financial guidance. We have recast our forecasts to reflect an expectation of broadly flat revenues with a recovery into FY2022E as customer stock levels normalise and impacts from Covid-19 diminish.
Petards supplies advanced security and surveillance systems to the Rail, Defence and Traffic Technology markets. This morning, the group has announced a new contract to supply Porterbrook Maintenance Limited with its eyeTrain systems.
Companies: Petards Group plc