Epwin Group — The best is yet to come

Epwin is an established and leading UK player in the supply of branded, low-maintenance building products. It operates manufacturing, fabrication and distribution facilities in a two-division structure with some interdivisional product supply. Having developed its footprint through organic and acquisitive investment, the company has a robust operational platform to rebuild and grow earnings from the pandemic-affected FY20 levels.

Epwin’s FY21 update flagged an expected adjusted PBT outturn ‘modestly above’ expectations (consensus £12.8m, Edison £12.7m). Consequently, FY21 will show a good rebound from COVID-19-affected FY20, although not fully back to FY19 levels, owing to input cost pressures. We expect this to continue into H122 at least and have taken a cautious view on progress at this stage. Our estimates suggest Epwin will regain pre-COVID FY19 PBT and EPS levels by FY23. We contend that, based on historic reported margins and actions taken to enhance the business’s operational platform subsequently, Epwin could become capable of delivering an 8% group EBIT margin, which would translate to record profitability (EBIT of £26.5m, versus £25.6m in FY16 and our £20.8m in FY23e) at current revenue levels.

Based on our latest estimates, Epwin moves from a modestly geared end FY21 balance sheet (c £9m core net debt, c 0.4x our FY21e EBITDA on a pre IFRS 16 basis) to a funds neutral position at the end of FY22 and positive net cash the next year, driven by rising EBITDA levels and free cash flow generation of £15–20m per year. Epwin has plenty of headroom to invest in business development and this would enhance dividend prospects.

Epwin is trading on FY22 valuation multiples of P/E 12.9x and EV/EBITDA (pre IFRS 16) of 5.6x, followed by 11.0x and 4.8x respectively in FY23. We expect the recovery in earnings to be accompanied by a faster pick up in dividends to generate prospective yields of FY22 3.4%, FY23 4.2%.

The earnings ratings suggest significant growth is not being anticipated by the share price after prospectively restoring and slightly enhancing profit levels immediately before the pandemic. While it might be premature to fully factor in an 8% group EBIT margin (and we have not done so in our 5.6% FY23 estimate assumption), investors should consider the likelihood of such an outturn and the impact on valuation, even if the timescale is indeterminate. We believe a recognition of this potential would elevate Epwin’s rating above a fairly narrow range among peers, which appears to show little differentiation across the constituent companies.

Epwin is a UK-oriented business predominantly focused on the repair, maintain and improvement (RMI) sector of residential building and construction. The primary long-term business driver is an ageing housing stock underpinned by a rising population and increasing environmental standards. Sub-sectors have different funding and policy drivers and may not move in step within building industry cycles, which are influenced by overall economic growth and household-level drivers such as employment, consumer confidence and interest rates. On a short-term basis, and as seen in FY20 and FY21, rising input costs can temporarily constrain margins (and vice versa) as price pass through mechanisms are implemented.

Epwin is a leading UK manufacturer and distributor of low maintenance and predominantly exterior branded building products. Since its AIM IPO in July 2014, a stable executive management team has deepened and broadened the company’s exposure to its core focus areas through investment in new products, footprint consolidation and rationalisation and acquisitions.

Operating a two divisional structure, manufacturing-led E&M activities and installer/distributor-led Fabrication & Distribution (F&D). E&M accounts for almost two thirds of group revenue and has historically generated a higher EBIT margin.

Epwin has a stable of product and distribution brands. Both divisions service B2B customer channels and, with a degree of vertical integration between them, we estimate around one-fifth of E&M gross product sales go to F&D. E&M mainly sells to window and door fabricator customers nationally and to independent distributors typically specialising in roofing products. F&D also operates its own network of c 90 distribution branches in regional clusters filling gaps in E&M’s customer footprint, and undertakes some fabrication work at three sites, using E&M profiles. Market channel management is a key discipline to avoid own and third-party branches conflicting.

Epwin predominantly serves the residential repair, maintain, improve (RMI) market and this represents c 70% of turnover. We estimate the remaining 30% is split broadly evenly between residential newbuild and social housing/commercial. Sales activity is directed at B2B customers and installers to pull business through its various market channels.

Epwin’s executive management team members (CEO Jon Bednall, CFO Chris Empson and Shaun Hanrahan) were all in post before and at the time of the 2014 IPO. A consistent strategy has been followed with a clear focus on low-maintenance building products. Leading positions in window systems and roofline products have been enhanced through consolidation and investment in the E&M operational footprint and the launch of new products. The F&D division has been re-shaped with increased exposure to distribution activities. Both divisions have benefitted from post IPO acquisitions aligned with the core business focus, product-led in the case of E&M and branch expansion in F&D. The NED team currently comprises Andrew Eastgate who became chairman in December 2014 and Shaun Smith joined the board in January. A third NED search is underway to replace Michael O’Leary (NED since 2015) who has recently retired.

In the divisional commentary below, we outline some of the development activity the group has undertaken.

With trading remaining strong to the year end, Epwin’s FY21 update noted an expected adjusted PBT outturn ‘modestly above’ expectations (consensus £12.8m, Edison £12.7m).

At the interim stage, against the undisturbed (pre COVID-19) FY19 year, headline revenue progress was +13%; c 10% was stated as organic plus a maiden contribution from SBS (an eight-branch distributor acquired in January). The full-year FY21 figure rose to +17% on the same comparative basis, implying that the rate of progress accelerated to c 21% in the second half. While a further, smaller acquisition (PBS) was made at the end of H1 this is unlikely to have affected this uplift materially. Input price pressures (especially but not only polymer grades) became a feature of the building materials supply chain generally during H220 after a stronger than anticipated post-lockdown demand and this continued throughout most of FY21. Consequently, cost-driven price inflation is likely to have been the primary driver of accelerated progress in H2 in our view. As a result, Epwin expects to report full-year FY21 revenue of c £330m, which is c £20m higher than we had anticipated before the update. Underlying volume trends will be closely watched across the industry in the forthcoming reporting cycle.

No further divisional detail was provided with the pre-close statement. F&D led the way at the interim stage with revenue up c 17% vs H119 (including the SBS effect) while E&M was ahead by c 11% in clearly firm end markets. It is interesting to note the F&D EBIT margin was c 300bp higher in H121 compared to H119, while the E&M margin reduced by a similar amount (both 6.6% for the period). This is perhaps indicative of the polymer supply strains in the primary manufacturing operations but also the high demand levels (and perhaps wider industry supply constraints) across the merchanting network. Each division faced the input cost pressures referenced above and we would expect that price increases in the second half provided some benefit to of them, perhaps with a slightly larger ‘catch up’ element in E&M, contributing to the inferred acceleration in the group top-line overall.

Despite supply-chain pressures, Epwin appears to have had a strong cash flow performance in H2, ending the year with core net debt (pre IFRS 16) of c £9m. This compares to c £18m at the beginning of the year, c £15m at the end of H121 and our c £17m expectation for the year end.

All in all, this was a good year-end update from Epwin, which has come through FY21 on the favourable side of expectations for the headline financial metrics. Moreover, at the start of the new financial year, trading in the first two weeks of January ‘remained strong’ which, although a short period, is encouraging, pending the FY21 results announcement on 6 April. Ahead of this, we have brought our FY21 estimates in line with year-end guidance including a modest earnings upgrade. We have also made smaller increases to our revenue expectations beyond FY21 based on current run rates, though have left profit expectations unchanged at this stage pending greater clarity on the pass through and recovery of input cost inflation.

In this section we outline the changes and challenges Epwin has faced and overcome as a listed entity and explain why the company has never been better placed to deliver value for shareholders.

Since its pre-IPO year in 2013 to our estimated FY21, Epwin’s headline revenue CAGR is c 3% with a reduction in EBIT margin of c 90bp (to c 5.2%) in the latest period compared to the first. The latest period contains distortions from sharply increased polymer input costs (inflating revenue but also depressing margins temporarily) but this comparison also conceals significant change within the group over the last nine years, as follows:

Epwin has invested in line with depreciation overall while significantly upgrading capability during this period and generated annual free cash flow approaching £20m on average (including c £30m in two of the last three years) before annual IFRS 16 lease repayments running at £13m per year.

Having ended FY21 with £9m core net debt (less than 0.4x our FY21e EBITDA), Epwin has created an enhanced business platform with significant financial headroom and, we would argue, less distraction from structural change. Consequently, we believe management has the flexibility to invest further in the business (organically or through acquisitions) and, subject to activity levels here, grow dividend distributions to shareholders. In the very near term, the pass through of higher input prices may continue to constrain margin development in H122 but this should not detract from the strategically strong positioning that management has created.

As shown in Exhibit 3, Epwin reports under two operating divisions, which are effectively defined by their functional processes, E&M and F&D. Both divisions have undertaken business improvements since Epwin listed in 2014 and we now focus on the business models and how they have developed in each case in a group context.

As the name suggests, the primary activity of E&M is the design, manufacture and support of branded building materials produced via the following processes:

Extrusion of profiles: window systems (frames and related), fascia/soffit/cladding boards, guttering, decking boards. PVCu is the dominant polymer material used along with wood plastic composite (for decking boards only). Aluminium product profiles (both window systems and decking ranges) are designed in-house and produced by third parties.

Moulding of components and finished products: a number of different manufacturing processes are employed by Epwin, chiefly injection moulding (rainwater components as part of guttering systems, dry verge roofing systems, cavity closers, drainage chambers) and GRP moulding2 (chimneys, window/door canopies, dormer window enclosures).

Order visibility is typically four to eight weeks, although this lengthened significantly at the end of FY20/beginning of FY21 reflecting industry-wide supply chain strains. The division usually operates with relatively short inventory positions in polymers (usually days rather than weeks or months) and carries finished profile inventory to support customer service. Manufacturing operations then are tasked with maintaining product availability. Foiling (adding colour laminate where required) and the sourcing of ancillary functional items such as seals and hardware, which generally have longer lead times, add a degree of complexity to this balancing process.

As a leading producer, we would expect Epwin to be a competitive buyer of the polymer resins it uses. Hence, profitability is driven by throughput efficiency in manufacturing and distribution to achieve high service levels and support brand positioning. We now consider the footprint actions that have been taken to enhance operational performance in these areas.

Manufacturing efficiency: consolidation of PVCu window profile production on a single site in Telford (having absorbed some lines from an exited Macclesfield site in FY17) and into two primary brand families, Optima and Spectus. The purchase of a new Telford site (at the end of FY19, see below) facilitated the relocation of foiling operations into an existing building there, which enabled the main window profile extrusion site in Telford to add capacity and improve efficiency. Investment in two new more flexible foiling lines also increased capacity at the new location and the aluminium window profile operation (Stellar, first launched in H1 2019) is also located there. Other profile production sites (at Scunthorpe, Kestrel brand, and Tamworth, Swish and Kayflow brands) have benefitted from investment but have not undergone structural reorganisation in the same way.

Supply chain management or service levels: further development of the new Telford site included the construction of a new purpose-built warehouse facility to effectively house window systems inventory on a single site for the first time (this process will be complete in 2022 when the remaining profile lines are moved in). The benefits of doing so. having consolidated from four other smaller locations, are expected to come in enhanced service levels to fabricator customers and implicitly increased potential volumes. There are parallels with the already established Tamworth distribution facility for the other higher volume building products produced by this division and which services both in-house and third-party distributor networks.

We see a much more streamlined manufacturing and aligned warehousing structure around three focused locations for the principal, higher-volume lines. The simplified and segmented brand structure should also bring marketing benefits, supported by enhanced service levels and a broader product range. In this regard, we would highlight these developments since listing:

We should acknowledge the loss of business caused by two customer events in 2017 (ie Entu’s administration and the sale of SIG Roofing to a competitor), which also affected progress the next year. However, we would expect the above actions have strengthened market relationships with Epwin’s core fabricators and specialist roofing distributors and the introduction of new digital resource for window installers to drive volumes through partner fabricators is one example of this in action.

With market confidence dented by Brexit uncertainties in 2017/18 followed by COVID-19-related industry disruption (both lockdown phases and the unprecedented rate of recovery collectively covering much of FY20 and FY21), we sense the full benefits of these actions in this division are substantially still to be seen. In previous years, this division has delivered EBIT margins in excess of 10% and we believe a medium-term sustainable target of 10–12% is feasible on the enhanced business platform once the dilutive input price effects have been passed through.

This division is part of the supply chain for low-maintenance exterior building products, sitting downstream from E&M as a trade-focused B2B supplier to installers, contractors and general builders. As a buyer of profiles and products from the E&M division approximately two thirds of the F&D supply chain is internalised within the Epwin Group. Other third-party products are also sourced and sold, and complement the primary branch offer (eg sealed glass units, roofing consumables).

This uses profiles sourced from the E&M division. Window fabrication is built to order (using measurements provided by window company customer surveyors/installers) and the door range will be a combination of bespoke and stock items. Wrekin Windows is primarily focused on the social housing/contract sub sector, while Sierra Windows has a greater orientation towards the residential RMI market. Permadoor supports both proprietary window companies and operates as an independent supplier of its range of door types.

The c 90 strong branch network operates in England, Wales and Scotland extending from the south coast of the UK up to Perthshire. They carry a range of low maintenance building plastics, from roofing down to below-ground drainage and some internal panels, aligned with group manufacturing capability and supplemented with complementary third-party products. The branches are operated under a number of different brand names, substantially in clusters on a regional basis. They serve local building markets with a proposition built on comprehensive range availability supported by local or central stock availability.

East Anglia-based supplier and installer of decking and other products to the primarily to the leisure and commercial sub-sectors. As with the distribution branches above, PVS carries a range of E&M and third-party sourced products.

When Epwin listed in 2014, it had seven fabrication facilities and a c 30 branch distribution network and we estimate that revenue generated from fabrication activity was more than double that in distribution at that time. In the intervening years, the F&D division has undergone some structural changes and also been rebalanced more towards distribution – which account for just over half of revenues now - as a result.

On the fabrication side, Epwin had consolidated two separate glass-sealed unit operations onto a single site before exiting this activity via a disposal in 2019. The group window fabrication operations now source these units externally which removes earnings volatility from swings in utilisation levels that the in-house glass operations periodically experienced. This had been exacerbated by the administration of a significant customer (AIM listed Entu), which led to the disposal of the primary window fabrication operation that supported it and was followed by the subsequent closure of a smaller one. The remaining three fabrication sites (at Paignton, Telford and Upton-on-Severn) are right-sized for the market segments they address.

With regard to distribution presence, Epwin has more than doubled the number of branch locations in the F&D division, largely through acquisitions:

The spread of acquisitions appears considered permitting each to be absorbed in a measured way. Strategically, these additions should be seen as infill deals not only for the F&D division but also in a group context, where overlap with E&M customers is to be minimised to avoid perceived conflicts of interest. Geographic fit is clearly one aspect and securing market position is another; in some cases, the acquired branches were previously Epwin customers, so the operations are already well known to the group, but this action also prevents competing suppliers acquiring and substituting their own products. Indeed, this is what happened when GAP Plastics acquired SIG’s roofing branch network in 2017, affecting F&D sales at that time.

Having trade customer access facilitates a pull through of the wider portfolio of group products, representing incremental sales opportunities and the capture of both manufacturing and distribution margin at group level. This was also the thinking behind the acquisition of Norfolk-based installer PVS in 2019 to improve market access for decking products. While the branch outlets have retained their separate brand identities, we have seen indications of a more common platform across the operations and a greater alignment of inventory line items over time. As one would expect, this has been done carefully and should permit the benefits of scale economies, particularly with regard to network logistics.

The strategy for the F&D division is clear; we expect to see a continuation of selective branch network expansion where it does not conflict materially with E&M’s independent distributor network. A target number of branches has not been set, nor a pace at which additional ones are likely to be added. As before, existing group customers may become vendors and we would expect Epwin to naturally explore these options as they arise.

We believe the manufacturing and warehousing optimisation undertaken by the E&M division should have knock-on service benefits for F&D operations as well as third-party customers and the pull through of proprietary manufactured products should potentially be enhanced as a result.

Historically, the F&D division has reported annual EBIT margins3 ranging from 2.1% (in FY17) to 5.1% (in FY13). We believe this hybrid division should consistently generate margins of 4–6% or possibly higher depending on mix. Specifically, a stronger social housing sector should be beneficial with an improved contribution from fabrication activities. It should be noted that fluctuations in polymer input prices and the resulting timing of pass-through effects to customers can periodically lead to temporary margin distortions (downward pressure until rising input prices are recovered and vice versa). Note that this applied to trading in the second half of 2021 and, we expect, the first half of 2022, with higher demand levels driving progressively higher feedstock and polymer grade prices among other input costs contributing to supply chain pressure across the building materials industry generally not just in low-maintenance products.

Epwin substantially generates revenue and profit in the UK where its operations and primary B2B trade-customer base reside. The company manufactures, fabricates and supplies low-maintenance building products. Residential end markets account for 90%+ of sales, although this is spread across a number of sub-segments, with modest commercial exposure accounting for the rest.

According to a 2015 Eurofound briefing paper4 the UK housing stock of c 28m dwellings comprised almost 40%, which were built before 1946 (and a similar percentage constructed between 1946 and 1980), giving it the oldest profile among EU member states at that time. Renovation of ageing residential dwellings (over 60% of which are owner occupied, with the remainder split broadly equally between the private and social rented sectors) is a key structural driver for Epwin. Energy saving and other environmental measures (including thermally efficient glazing and low maintenance considerations) are relevant to Epwin’s product portfolio.

The housing industry exhibits cyclicality driven by employment levels, consumer confidence and interest rate prospects to the extent that they influence residential end market behaviours. RMI spending typically follows secondary housing market transactions with a lag. Population growth can influence both RMI activity and the demand for new housing. The funding and policy drivers for private, private rented and social housing differ and so each sub-segment may not move in step with the others.

Major short-term market gyrations are not that common, although uncertainty in the run up to Brexit and initial Covid19 lockdown phases had above normal dampening effects on building sector activity followed by notable rebounds particularly in the later case to date. One consequence of this has been widespread sector shortages – with low inventory positions exacerbated by logistics challenges following higher than expected demand – and materials price inflation. In Epwin’s supply chain this generally affect others in in similar ways; input price increases are typically passed through with a lag for full recovery. In Epwin’s case inventory recognised as an expense in FY20 accounted for c 80% of COGS and approaching 60% of revenue so is clearly significant; in FY21 the initial input price pass through phase will both inflate revenues and constrain margins, before the latter effect recedes as recovery improves into H222.

The window/door and low maintenance building products sector are well established and Epwin is a leading player in its areas of operation. There are a relatively small number of window systems houses, with varied geographic exposures in Europe and levels of independence, which have been largely stable, although ownership changes can occasionally lead to market share changes. Fabrication, window brands and distribution competition tend to be more regional/local in nature and as a consequence they are considered to be fragmented. Purchasing power, good service reputation and ability to introduce innovative new products are all sources of competitive advantage in this space.

As noted above, energy saving and low-maintenance building products are positive in-use attributes for Epwin’s product portfolio. The materials used (including PVCu, polypropylene, aluminium and glass) are substantially recyclable and some of the products themselves are capable of manufacture using a proportion of recycled material, which Epwin acquires from third parties. PVC products account for over 70% of Epwin’s sales; formed into profiles, it is typically used as a substitute for external timber applications, which are less thermally efficient and require greater in situ maintenance. In addition, some recycled PVC is used, although virgin polymer usage dominates. In addition, GRP (c 10% revenue) is an alternative to other natural materials (such as bricks, tiles and lead), while decking (either PVC or WPC-based, c 5% revenue) also has a high recycled material content. Epwin’s wood composite decking is made from single-use plastics and wood particles and has been attributed a carbon negative production profile5. These products are typically lighter than traditional building materials, suggesting a favourable distribution footprint also.

Site consolidation and increased distribution efficiencies will have served to improve Epwin’s own operational emissions footprint and the building industry generally is now in a phase in which scope three (supply chain) emissions are more closely observed. Industry participants must be able to measure, report and set emissions targets for improvement to be successful.

Prior to general equity market volatility in the last three weeks, Epwin was rated at similar levels to many of its UK-oriented building materials peers and offered a prospective dividend yield towards the upper end of this group. With a few notable exceptions, this suggested to us that the market was not differentiating between these business models or indeed the underlying sub-sector exposures that these companies have. Epwin’s share price has been relatively stable and after recent moves elsewhere, Epwin has opened up small rating premia to the building materials manufacturer/distributor pack though has not attained the levels of some larger players.

Epwin is a leading player in its sectors and, having gone through a period of consolidation and repositioning is arguably in the best position to develop since first listing in 2014. While it perhaps has a slower post-COVID-19 earnings recovery profile than some on our estimates, we believe the EBIT margin potential prospectively offers more growth upside. In financial terms, the company is modestly geared and set to move towards a funds neutral balance sheet in FY22. This, together with existing banking facilities (and no pension scheme deficit requiring cash injections), provides flexibility to invest to grow earnings and dividends.

On our estimates, Epwin’s FY23 PBT nudges above the FY19 pre-pandemic levels for the first time, so while we clearly anticipate a good recovery from the FY20 low, we would not term this earnings growth in the conventional sense. On this basis, the company’s earnings multiples are:

Having restored and slightly enhanced profitability immediately before the pandemic, the FY23 rating suggests that significant growth is not being anticipated by the share price thereafter. We look at group EBIT margin potential and what that could mean for earnings upside in the Financials section below. While it might be premature to fully factor in an 8% group EBIT margin (compared to the 5.6% included in our FY23 estimate) there are good reasons why investors should consider the likelihood of such an outturn and the impact on valuation, acknowledging that the timescales are indeterminate at this stage.

We expect the recovery in earnings to be accompanied by a faster pick up in dividends to generate

Should our illustrative margin potential be realised, dividend prospects would be enhanced.

In the UK building materials space, business dislocation caused by the initial COVID-19 lockdown in the first half of 2020 followed by an extended rebound phase in the next 18 months has been a common trading pattern. Within this, the financial impact at individual company level has varied; for comparative valuation purposes we are taking FY22 as the more representative year, acknowledging that earnings may not have recovered to pre-COVID-19 levels in some cases.

Exhibit 5 shows Marshalls and Genuit are trading on a clear P/E premium to sub-sector peers, which we believe reflects strong historic trading records coupled with strong relative earnings rebounds. Epwin has opened up a rating premium to its nearest listed competitor Eurocell (following the latter’s recent share price decline) and also to brick manufacturers Ibstock and Forterra (not shown above); these three companies have greater exposure to the residential newbuild sector, but this does not appear to be a differentiator in rating terms. Alumasc is at the low end of the valuation range for this group.

Most of the distribution comparators6 for Epwin have already announced FY21 results, so we have not included them in Exhibit 5 (to avoid inconsistencies with manufacturer peers). They are largely UK oriented, although SIG, Grafton and Headlam have a more significant presence in mainland Europe than the other companies, including Epwin. Excluding SIG, which has been through a number of corporate turnaround iterations, Howden is the highest rated in this peer group, for similar reasons to Marshalls and Genuit above we believe. It is also worth mentioning that it has a more hybrid manufacturing/distribution model than the others. The remaining companies listed are in a fairly narrow P/E rating band of c 10–12x FY22 earnings (allowing for Brickability having a different year end) and Epwin’s P/E multiple is slightly above this range. We would observe that many of these selected distributor peers have greater exposure to non-residential sub-sectors, although at face value this does not appear to translate into a material rating differential.

We have covered financial progress since Epwin came to the market in 2014 above. FY20 was affected by COVID-19 lockdown disruption in H1 but, on a recovering trajectory, the H2 outturn was similar to the prior year. As a result, net debt rose only modestly over the year and a final dividend was declared. Post COVID-19 revenue expansion accelerated during FY21, including price inflation effects and these will have had a dampening effect on margins. Nevertheless, having invested in core manufacturing and logistics capability and increased the divisional emphasis on distribution in recent year, the company has a robust operational platform for future development. We consider that organic margin expansion, self-funded investment and faster prospective dividend growth will characterise Epwin’s future financial performance.

FY21 earnings will show a good rebound from COVID-19-affected FY20 although they will not have regained FY19 levels owing to input cost pressures. We expect this to continue into H122 at least and take a cautious view on later progress at this stage (reaching an EBIT margin of 5.6% in FY23).

Based on our earlier comments, sustaining revenue at FY21 levels, delivery of the mid-points of our indicative divisional target margin ranges (ie E&M 10–12%, F&D 4–6%) and allowing for central costs at 1% of revenue, would generate a blended group EBIT margin of 8%. In value terms, this equates to £26.5m EBIT, which is above the 2016 £25.6m peak to date and our £15m FY21e, or, on an ungeared basis, EPS of 13p, almost 90% above our FY21e level. Moreover, for the group as it is constituted, an outturn ahead of this is feasible in our opinion.

In the near term, a more stable input price environment allowing full recovery of recent inflation would be a welcome starting point and we believe such a scenario would bring margin upside more to the fore with investors.

Management has flagged core (pre IFRS 16) net debt of c £9m at the end of FY21, around half the level a year earlier and sub 0.4x EBITDA on the same basis for the latest trading year. In the next two years, we project EBITDA (pre-IFRS 16) rising in each year and being the key driver generating free cash flow of £10–20m per year on the same basis. As a result, despite some in-year variation ahead of seasonally busier periods, we expect Epwin to have minimal gearing at the end of FY22 and be in a c £6m net cash position at the end of FY23 (excluding leases). Note that this is after paying c £4m and c £5m cash dividends in these years, respectively and absent any acquisitions.

Based on these cash flows alone, we consider there is scope to increase the level of dividend payout. That said, dividend cover reduces to just below 2.2x by FY23 on our estimates, which suggests the upside is more limited from an earnings perspective. If some of the margin evolution described above transpires, we would argue that a higher dividend payment is achievable from both earnings and cash perspectives.

With low gearing and a £65m revolving credit facility in place until June 2024, Epwin clearly has plenty of headroom to make further complementary acquisitions as it has already demonstrated as a listed company. Epwin also has a £10m overdraft facility in place which could be used for smaller deals. Taking a medium- to longer-term view, earnings enhancing deals boost dividend prospects.

Epwin had c £76m IFRS 16 leases on the balance sheet at the end of H121. We assume the annual c £11m right-of-use asset depreciation and c £13m capital repayments remain stable across our estimate horizon.