Epwin Group – Solid Foundations

Despite the way the FTSE100 Index is currently breaking new highs I am convinced that the majority of UK quoted companies are still facing ‘headwinds’ unlike the ‘internationals’ that make up most of that index.

Company after company having reduced market guidance for 2022, 2023 and 2024 sales and profit figures, in my view that defeats the current ‘market euphoria’ suggested in the media.

However, there are a number of companies in my ‘small cap’ sector that have managed Covid-19, staff shortages, supply problems and the like, many of which are now trading on sub-market norm ratings.

The Epwin Group (LON:EPWN) is one such selection.

With its shares currently trading at just 75p, they are on just 7.1 times its current year price-to-earnings ratio, which is less than half of the market average.

They are also currently yielding a 2022 forecast 6.1% – which adds even more to the attractions of the group.

The Business – Organic And Acquired Growth

The group, which is capitalised at £109m, is a leading manufacturer of energy efficient and low maintenance building products, supplying the Repair, Maintenance and Improvement, new build and social housing sectors.

Established way back in 1976, the Epwin Group has changed significantly from its origins as one of the first PVC-U window fabrication businesses in the UK.

It floated on AIM in July 2014, since when it has grown both organically and by acquisition to become the leading manufacturer of energy efficient and low maintenance building products for the Repair, Maintenance and Improvement, social housing and new build markets in the UK.

The group serves the trade, retail, new build and social housing sectors through a nationwide network of merchants, plastics stockists, window, door and conservatory manufacturers and installers.

Its products are designed and manufactured in-house to suit the needs of our end-user markets and are sold under established and trusted brands. The group has a wide product range to cater for all requirements and is constantly investing and innovating in new processes, products and services.

The Extrusion and Moulding business (61% of group sales) is the UK’s largest manufacturer of extruded window profile, cellular roofline and cladding, rainwater, drainage, decking systems and GRP building components.

Epwin is the market leader in supplying leading brands of PVC-ue extruded cellular roofline and cladding systems for the replacement and installation of fascias, soffits, barge boards and cladding.

The Fabrication and Distribution business (39% of group sales) includes the group’s national network of plastic distribution outlets and Window stores, complementing the group’s commitment to its independent distributor customers, as well as servicing specialist customer requirements with fabricated windows and doors from the group’s own profile systems.

Trading Update – 25 January

Trading was reported to have been robust through the year to the end of December 2022, with revenues increasing by 8% to some £355m (£329.6m).

That advance was mainly driven by pricing actions to counter cost inflation in the sector, as well as bolt-on acquisitions completed in 2022 which contributed revenues of £4m in the year.

It continued to navigate the issues of labour, energy and raw material cost inflation.

As a result, the company expects to report adjusted profit before tax for 2022 in line with current market expectations of £16.3m, which is a significant increase over 2021. 

At the announcement time CEO Jon Bednall stated that:

“Our trading performance remained robust through 2022 and we continue to execute our strategy, confident in the strength of the medium and long-term drivers for our markets, despite the short-term macro-economic challenges.”

Robust Current Trading

Trading in the first weeks of 2023 has remained robust and has been in line with expectations. 

The group’s management remains confident of executing its strategy and in the strength of the medium and long-term drivers of its markets, despite the current macro-economic outlook.

The Equity – Good Professional Holdings

There are some 145.3m shares in issue.

Institutional investors include Ruffer (16.0%), Otus Capital (5.19%), Janus Henderson (5.07%), Chelverton Asset (4.25%), AXA Investment (4.08%), Unicorn Asset (3.45%), Lombard Odier (3.13%) and Hargreaves Lansdown Asset Management (1.54%).

Two private investors hold significant equity positions – Anthony Rawson (14.0%) and Brian Kennedy (14.0%).

Broker’s Views – Suggesting A ‘Fair Value’ Of 100p

Analyst Graeme Kyle at Shore Capital Markets considers that the group’s shares have hardly participated in the post-Truss market rally.

His estimates for 2022 show revenues of £352.3m (£329.6m), with adjusted pre-tax profits of £16.3m (£13.7m), allowing or recent acquisitions slightly lower earnings of 9.0p (9.1p) but with an increased dividend of 4.5p (4.1p) per share.

Going forward Kyle’s figures suggest £369.4m sales this year, £20.2m profits, 10.6p earnings and a 5.3p dividend per share.

The next year to end December 2024 could see revenues rising to £379.9m, £23.3m profits, 11.8p earnings and a dividend of 5.9p per share.

His discounted cash flow model suggests a ‘fair value’ of 100p a share.

My View – Fixing A New Target Price Of 94p

This group’s shares, which were up at 108.5p this time last year, have subsequently been down to 68p, but are extremely appealing at just 75p – trading on 7.1 times current year earnings and yielding a possible 7.0% for the year.

Furthermore, the group’s sales and profits growth over the last few years has been impressive, when so many others have found macro-pressures to be overwhelming.

That surely is a strong signal of totally aware management.

Ahead of the finals, due to be announced on Tuesday 4 April, I am now confidently fixing a new Target Price of 94p on the shares.

(Profile 22.08.19 @ 73.5p set a Target Price of 100p*)

(Asterisks * denote that Target Prices have been achieved since Profile publication)