Epwin Group – on 7.5 times pe, yielding 6.8% and offering 33% price upside, these shares are cheap, writes Mark Watson-Mitchell.
In such tricky markets such as we have been enduring of late, I consider that seeking out undervalued quality combined with growth potential is a safer way to select portfolio constituents.
So alighting on a recent research report on Epwin Group (LON:EPWN) perked my senses. For the repair, maintenance and improvement, new build and social housing sectors this group manufactures and sells low maintenance building products.
In this stock I discover that several of my required criteria are met – market leading brands, progressive profits, good balance sheet, undervalued, and a very healthy yield. Epwin scores very well indeed.
It is certainly not a ‘go-go’ stock but much more a steady improver.
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Established in 1976 the company was previously quoted on the USM market from the late 1980s up until it was taken private in 1999. It was merged with another group in 2012 and came to the AIM market in 2014.
Despite a generally unsettled marketplace together with a difficult economic and trading environment, this company has honed its operational efficiencies and coped with such hassles by looking to improve its margins.
Two weeks ago, the company announced a trading update for the six months to the end of June declaring that although business had been ‘robust’ it had produced a pleasing performance which was up to board expectations. While it remains cautious about macro-economic conditions, it still expects to make further strategic progress in the second half and is confident about its longer-term prospects.
Not only does the Solihull based group sell its products in the UK and in the rest of Europe, it also operates internationally, but on a much smaller scale. It employs over 2,300 people across its operations.
It has two main operating divisions: Extrusion and Moulding, and Fabrication and Distribution.
Apart from being involved in the extrusion of PVC-u and PVC-ue materials, it also supplies plastic building products.
The company’s product range includes: windows, doors, cavity closers and curtain walling products; glass reinforced plastic prefabricated components, such as chimneys, copings, bay window canopies, dormers, door canopies, and bespoke components; bathroom panels and wall boards; wood plastic composite decking products and panels; conservatories; fascia and cladding systems; insulated glazing units; and, rainwater, soil, and underground drainage products.
It sells through a network of 53 building plastic trade distribution centres and 15 window stores.
Its range of customers is very wide, it serves new build companies, architects, designers and specifiers, social housing providers, DIY retailers, contractors, builders, builders merchants, specialist roofline and window stockists, window fabricators, window installers, roofline installers, bathroom installers, bathroom wholesalers, and, finally, homeowners.
On Wednesday 11 September the company will announce its interim results and trading review.
Current estimates suggest that sales will increase from £281m to £290m for the full year to end December, with pre-tax profits rising from £16.5m to £17.6m. Earnings could come out at 10p and dividend of a twice covered 5p per share.
Next year could well improve sales to £297m, with profits edging better to £18.7m, earnings up to 10.7p and an increased dividend of 5.3p per share.
Further out into 2021, estimates of £305m sales could produce £19.2m pre-tax profits, with earnings up to 11.2p and a 5.6p dividend per share.
The company has recently secured new banking facilities, with a three to five-year arrangement – giving it a £65m revolving credit and a £10m overdraft. Its level of debt is an example of its strong balance sheet and is well covered. It also gives it the ability to progress and invest in its business.
The group has 142,925,173 shares in issue, of which two private but connected holders, Anthony Rawson and Christine Kennedy, each have 14.17% of the equity.
Institutional holders include: Ruffer (9.37%), Unicorn Asset Management (6.79%), Premier Fund Managers (6.65%), Janus Henderson Investors (4.70%), Otus Capital Management (5.01%), Chelverton Asset Management (3.67%), and AXA Investment Managers (3.22%).
All of those shareholders should hold firmly onto their stock, in my opinion. Despite trading being a bit tricky I believe that the group is more than capable of weathering through. We will see whether this is so with the interim results.
However, the shares at just 73.5p value the whole group at less than £107m. On current-year estimates they trade on a mere 7.5 times price earnings ratio and yield a very healthy 6.8%. My target price by the end of next year is an easy 100p.