Epwin Group — Update 28 September 2016

Epwin Group (AIM: EPWN)

Last close As at 21/11/2024

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Market capitalisation

GBP149m

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Research: Industrials

Epwin Group — Update 28 September 2016

Epwin Group

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Written by

Industrials

Epwin Group

Making good headway

H116 results

Construction & materials

27 September 2016

Price

115.75p

Market cap

£164m

Net debt (£m) at end June 2016

29.9

Shares in issue

141.5

Free float

67%

Code

EPWN

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.8

(3.5)

(15.2)

Rel (local)

5.2

(13.0)

(23.3)

52-week high/low

149.00p

97.00p

Business description

Epwin supplies functional low-maintenance exterior building products (including windows, doors, roofline and rainwater goods) into a number of UK market segments and is a modest exporter. It has a vertically integrated model in windows and doors and a leading market position in roofline products.

Next events

FY16 ends

December 2016

Analysts

Toby Thorrington

+44 (0)20 3077 5721

Roger Johnston

+44 (0)20 3077 5722

Epwin Group is a research client of Edison Investment Research Limited

Epwin has a busy agenda of investment, new product development and bedding in acquisitions, but this has not been at the expense of underlying trading performance. Group forward momentum has been generated by management actions and there was no change to underlying earnings guidance before the beneficial impact of the National Plastics acquisition.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/14

259.5

18.0

11.2

4.2

10.3

3.6

12/15

256.0

19.2

11.7

6.4

9.9

5.5

12/16e

298.0

24.5

14.0

6.6

8.3

5.7

12/17e

313.5

25.9

14.6

6.9

7.9

6.0

Note: *PBT and EPS FD are normalised, excluding intangible amortisation and exceptionals.

Consistent themes, acquisitions contributing well

Divisional performance was not uniformly positive in H116 with Extrusion & Moulding (E&M) making LFL progress in revenue, margins and EBIT, while Fabrication & Distribution (F&D) continued to grapple with variable demand patterns. The prior year acquisitions (Stomking and Ecodeck, both in E&M) are trading above their pre-acquisition levels and contributed well and the H116 addition of National Plastics will boost F&D’s trade outlet presence. Investment has been a consistent theme over the last 18 months and selective capex and possible further bolt-on deals remain in focus. We expect net debt to have reduced from £29.9m seen at the interim level to c £23m by year end and the group remains conservatively financed.

National Plastics raises estimates

Stocks exposed to the UK residential housing market have been given a rough ride since the Brexit result but underlying markets seem to have largely reverted to normal trading patterns after observing a dip immediately before/after the vote. Management made no change to existing guidance regarding the current year outturn. We have followed through the divisional trends seen in H116 into our FY16 estimates, the net result (Extrusion & Moulding better, Fabrication & Distribution lower) being no underlying profit changes. The National Plastics acquisition causes us to nudge up FY16 PBT for the group overall, with full-year effects in FY17 reflected in a c 2% EPS uplift.

Valuation: Remains attractive

Epwin’s share price has gained c 7p since H116 results were announced but, like others in the sector, has underperformed the FTSE All-Share Index over the last quarter. Indications of improving post-Brexit markets will benefit all these companies, but Epwin is not reliant on this to deliver progress in the current year. The rating has increased slightly since our last note, Clear drivers for progress, to FY16e P/E of 8.3x and EV/EBITDA of 5.5x, which remains attractive given the underpin from acquisition contributions. A prospective yield of 5.7% is another important consideration in a generally low-yield environment.

H116 results overview

First half trading was characterised by a comparable underlying group performance – with a different divisional mix – supplemented by a strong contribution from acquisitions. Investment remains high on the corporate agenda, with raised levels of capex and the purchase of National Plastics towards the period end. Coupled with natural business seasonality, these were the primary drivers behind an increase in net debt to £29.9m at the end of June. We have increased our estimates slightly as a result of the National Plastics deal.

Exhibit 1: Epwin Group divisional and interim splits

Year-end December (£m)

H1

H2

2015

H1

% change

% change

Reported

Est LFL

Group revenue

124.1

131.9

256.0

143.3

15.5

0.6

Extrusion & Moulding

69.9

76.7

146.6

90.5

29.5

5.3

Fabrication & Distribution

54.2

55.2

109.4

52.8

-2.6

-5.4

 

 

Group operating profit

8.0

12.1

20.1

11.8

47.5

1.3

Extrusion & Moulding

7.2

10.5

17.7

11.6

61.1

11.1

Fabrication & Distribution

1.6

2.6

4.2

1.1

-31.3

-37.5

Group costs

-0.8

-1.0

-1.8

-0.9

12.5

12.5

Source: Company, Edison Investment Research. Percentages are approximations based on rounded figures.

Extrusion & Moulding (E&M): Primarily PVC-based window profile systems, roofline and rainwater goods extrusion activities; wood composite decking products and glass reinforced plastic building products were added to the portfolio offering via two acquisitions (Vannplastics and Stormking, respectively) in H215. (Divisional margin references below are before central costs.)

In underlying terms, existing E&M operations delivered increases in revenue and EBIT of c 5% and c 11%, respectively raising EBIT margins by 60bp to 10.9% in the process. We note that this rate of top-line progress was ahead of that achieved in FY15 (ie +2.6% which included a slower H2 trading period). We read this as being the product of a slightly more favourable balance of business performance rather than an improvement in market conditions. Specifically, the prospective roll-out of a new window system (Optima) in FY16 would have been an increasing drag we feel as 2015 progressed. In H116 – during which the launch took place – window system revenues and volumes are understood to have been flat y-o-y and, hence, the headwind eased. At the same time, roofline demand was firm in H116 overall, while rainwater goods and drainage products – where E&M market shares are smaller – revenue increased by c 10% y-o-y. The net result of all of these elements was the c 5% uplift in underlying revenue noted above. Implicitly, we believe that the sale of proprietary manufactured products to third parties was ahead of the pull-through from the internal supply chain into Fabrication & Distribution (see below). By way of an update, the Optima system launch has been well received by the market; actual and planned conversions of existing fabricator customers onto the new system are progressing to plan and the process is expected to continue into H117.

This underlying progress was supplemented by two H215 acquisitions (ie Vannplastics in October and Stormking in December) making maiden H1 contributions. In absolute terms, aggregate revenue and EBIT of £16.9m and £3.6m, respectively was generated by these businesses. This represented an EBIT margin of 21.3%, raising the reported E&M margin to 12.8% overall (having accounted for c 19% of divisional revenue and c 18% of profit). Moreover, against their pre-acquisition comparator periods, revenues for both businesses are understood to be ahead c 10% year-on-year. Stormking is more exposed to and already has good penetration of the new housebuilder market (where demand levels have been strongest) while Ecodeck has more secondary/RMI exposure currently we believe. The product portfolios of both companies offer reduced lifecycle cost attractions (ie installation and maintenance) versus traditional materials.

Fabrication & Distribution (F&D): Downstream manufacture of glass sealed units and finished windows and doors (using profiles from E&M) and multi-channel B2B distribution – including own branches – of these and other group finished products.

The financial performance of the F&D division remains relatively weak and H1 profitability has now declined in each of the last two years. There is some seasonal H2 bias and we believe that H215 demonstrated some progress over and above this following management change and actions taken to improve operational effectiveness. We believe that there is more work required to increase operational flexibility between sites, including common systems links. Reducing the fabrication fixed cost base should make F&D divisional profitability more resilient at current levels of demand; the measure of progress will become apparent when the impact of higher revenues on profitability is seen.

As its name suggests, this division is a hybrid of functional activities. As a fabricator, it is clearly more sensitive to volume fluctuations than a distribution only business. Part of the weak top-line performance (underlying H116 revenue down c 5% y-o-y) is due to exposure to the social housing subsector which has seen lower activity levels in both newbuild and RMI we believe exacerbated by some client churn. A positive pull-through effect from residential housebuilders will have benefitted distribution volumes but management conceded that performance in the wider trade segment could have been better. In fairness our comments on profitability above are somewhat tentative. It is quite difficult to see the true underlying picture in the division with manufacturing cost reduction having taken place (partly through site consolidation), increased management and sales resource put in place and an unquantified cost associated with these actions taken above the line over the past 18 months or so.

On a reported basis, the percentage revenue and EBIT declines were slightly tempered compared to the underlying performance owing to the inclusion of National Plastics (acquired in June). Its circa one month trading contribution equated to c £0.7m revenue and c £0.1m EBIT in the period. The acquisition of this 30-depot plastic building products distributor increases F&D’s revenue and existing footprint of branches of this type. Strategically, it strengthens this route to market (whereas Stormking and Ecodeck were more focused on products and materials/process capability), with synergies most obviously in purchasing and systems integration. We understand that National Plastics was not an existing group customer. Epwin is to pay £10m cash consideration – with some of this being paid in H216 – which is roughly equivalent to 7x historic EBITDA. The deal enhances earnings by c 4% in the first full year on our revised estimates (see below).

Seasonality, investment and acquisition raise net debt position

Net debt stood at £29.9m at the end of June, an increase of £15.5m since December. Free cash flow was modestly negative for this six month period and, hence, the initial £8.7m cash paid for National Plastics together with an increased final dividend payment for FY15 of £6m were key drivers behind the headline net debt movement.

As we have seen, prior year acquisitions contributed to a significant uplift in EBIT (and EBITDA). The enlarged company also saw a higher seasonal working capital outflow y-o-y which we believe was to support expected E&M revenue growth. Operating cash conversion is always lower at the interim stage but did improve slightly on the prior year. On our measure (operating cash flow as a percentage of EBITDA), the rolling 12-month figure stood just above 100%. The other material free cash flow item in H116 was capex of £8.3m (including c £0.6m on intangibles relating to systems development). Spend on tangible fixed assets was over two times depreciation, substantially due to the new window system roll-out with some smaller incremental capex projects in other areas also. Otherwise, higher interest reflected higher net debt (especially acquisition effects) and while cash tax was slightly lower y-o-y, this was due to payment timing only and we expect an upward trend going forward consistent with rising profits.

Expected period end position: We expect higher H2 profitability and a seasonal working capital inflow to fund further discretionary cash outflows (on capex, dividends and a small element of National Plastics consideration) and still result in a reduction in net debt to c £23m by the year end. On our estimates (see below), this is less than 0.7x expected FY17 EBITDA (including full year acquisition effects), with interest cover in that year of c 19x (or c 24x on a cash basis). At the end of June, Epwin had in place banking facilities including a £35m RCF, a reducing term loan of £20m (both to December 2019) and a £5m overdraft agreement. As things stand, we expect a FY17 net cash inflow of c £10m and, taken together, Epwin clearly has headroom for further bolt-on acquisitions, should opportunities arise.

National Plastics nudges up estimates

Several companies operating in the building materials space reported weaker trading periods in the run up to and immediately after the EU referendum vote, consistent with wider industry data. In recent weeks, commentary has become more neutral with more normal trading patterns in evidence. The lengthening post Brexit time perspective is helpful, although management teams remain very vigilant. This is of particular relevance at this time of year (August through to the end of October) as it coincides with the busiest trading periods for many companies in the space.

As outlined previously, we expect acquisitions to be the primary driver of increased profitability for Epwin in the current year as seen in H116. On a net basis, we have made no change to our previous underlying EBIT/PBT estimates, with an upward revision for 2015 acquisitions offset by softer F&D profit expectations. We now incorporate the acquired National Plastics business into our model for the first time; with a conservative current year expectation (allowing for integration activity) and larger full year effects with the increases in estimates shown in Exhibit 2.

Exhibit 2: Epwin Group revised estimates

EPS FD norm

PBT norm

EBITDA

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2016e

13.8

14.2

+2.9

24.2

24.5

+1.2

33.3

33.8

+1.5

2017e

14.4

14.6

+1.8

25.4

25.9

+2.0

34.5

35.5

+2.9

2018e

15.1

15.6

+3.3

26.7

27.7

+3.7

35.6

36.8

+3.4

Source: Edison Investment Research. Norm excludes amortisation of acquired intangibles and exceptionals.

With a slightly higher interim dividend increase than expected (ie +3.8% against our previously anticipated + 2.8% for FY16 as a whole) we have nudged up our full year growth projection to 4.0% now. The c 3.5% growth now expected in the following two years is a slightly higher rate than before off a slightly higher base.


Exhibit 3: Financial summary

£m's

2012

2013

2014

2015

2016e

2017e

2018e

December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

Restated

 

 

 

 

 

Revenue

 

 

294.4

255.3

259.5

256.0

298.0

313.5

321.5

Cost of Sales

 

 

(209.9)

(185.8)

(186.7)

(178.6)

(207.9)

(218.7)

(224.3)

Gross Profit

 

 

84.5

69.5

72.8

77.4

90.1

94.8

97.2

EBITDA

 

 

21.8

21.3

24.5

25.6

33.8

35.5

36.8

Operating Profit (before GW and except.)

15.4

15.5

19.5

20.1

26.3

27.8

28.8

Intangible Amortisation

 

 

(1.7)

(1.7)

(1.7)

(0.0)

(1.0)

(1.0)

(1.0)

Exceptionals

 

 

(4.3)

(5.1)

2.3

(0.6)

(0.2)

0.0

0.0

Other

 

 

0.0

0.0

(0.8)

(0.4)

(0.4)

(0.4)

(0.4)

Operating Profit

 

 

9.4

8.7

19.3

19.1

24.7

26.4

27.4

Net Interest

 

 

(1.9)

(1.0)

(0.7)

(0.5)

(1.4)

(1.5)

(0.8)

Profit Before Tax (norm)

 

 

13.5

14.5

18.0

19.2

24.5

25.9

27.7

Profit Before Tax (FRS 3)

 

 

7.5

7.8

18.6

18.6

23.3

24.9

26.7

Tax

 

 

(2.2)

(1.2)

(3.5)

(3.3)

(4.4)

(4.9)

(5.3)

Profit After Tax (norm)

 

 

10.4

12.3

14.4

15.9

20.1

20.9

22.4

Profit After Tax (FRS 3)

 

 

4.5

5.0

15.1

15.3

18.9

19.9

21.4

 

 

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

122.3

122.3

128.0

135.2

141.5

141.7

142.1

EPS - normalised (p)

 

 

8.5

10.1

11.2

11.8

14.2

14.8

15.8

EPS - normalised (p) FD

 

 

 

 

11.2

11.7

14.0

14.6

15.6

EPS - FRS 3 (p)

 

 

3.7

4.1

11.8

11.3

13.3

14.1

15.1

Dividend per share (p)

 

 

0.0

0.0

4.2

6.4

6.6

6.9

7.1

 

 

 

 

 

 

 

 

 

 

Gross Margin (%)

 

 

28.7

27.2

28.1

30.2

30.2

30.2

30.2

EBITDA Margin (%)

 

 

7.4

8.4

9.4

10.0

11.3

11.3

11.4

Operating Margin (before GW and except.) (%)

5.2

6.1

7.5

7.9

8.8

8.9

9.0

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

 

 

Fixed Assets

 

 

56.9

54.7

53.8

91.7

106.9

106.7

105.2

Intangible Assets

 

 

27.9

26.4

24.7

57.9

68.1

69.1

69.1

Tangible Assets

 

 

26.1

25.1

26.2

33.1

38.4

37.2

35.7

Other

 

 

2.8

3.2

2.9

0.7

0.4

0.4

0.4

Current Assets

 

 

59.9

62.1

62.3

87.2

71.2

79.7

90.6

Stocks

 

 

20.9

21.7

22.4

23.6

28.7

30.2

30.9

Debtors

 

 

37.4

40.1

37.6

41.5

45.0

47.0

48.0

Cash

 

 

1.6

0.3

2.3

22.1

(2.4)

2.6

11.6

Current Liabilities

 

 

(53.2)

(54.5)

(49.0)

(68.8)

(58.1)

(61.6)

(64.4)

Creditors

 

 

(49.1)

(51.5)

(48.6)

(53.2)

(58.1)

(61.6)

(64.4)

Short term borrowings

 

 

(4.1)

(3.0)

(0.4)

(15.6)

0.0

0.0

0.0

Long Term Liabilities

 

 

(32.0)

(25.7)

(4.3)

(30.0)

(29.9)

(23.5)

(18.5)

Long term borrowings

 

 

(20.6)

(16.0)

(0.8)

(20.9)

(20.6)

(15.6)

(10.6)

Other long term liabilities

 

 

(11.4)

(9.7)

(3.5)

(9.1)

(9.3)

(7.9)

(7.9)

Net Assets

 

 

31.5

36.6

62.8

80.1

90.1

101.4

112.9

 

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

 

Operating Cash Flow

 

 

15.7

12.0

19.8

23.8

29.0

33.9

36.0

Net Interest

 

 

(1.4)

(0.9)

(0.7)

(0.5)

(1.4)

(1.5)

(0.8)

Tax

 

 

(1.6)

(0.9)

(1.7)

(2.3)

(3.9)

(4.4)

(4.8)

Capex

 

 

(4.6)

(4.9)

(5.6)

(9.0)

(13.0)

(7.0)

(6.5)

Acquisitions/disposals

 

 

(28.2)

(0.2)

0.0

(20.9)

(10.0)

(1.5)

0.0

Financing

 

 

0.0

0.0

10.0

0.0

0.0

0.0

0.0

Dividends

 

 

0.0

0.0

(1.9)

(6.7)

(9.1)

(9.4)

(9.9)

Net Cash Flow

 

 

(20.2)

5.1

19.9

(15.6)

(8.4)

10.0

14.0

Opening net debt/(cash)

 

 

0.5

23.2

18.7

(1.1)

14.4

23.0

13.0

HP finance leases initiated

 

 

(2.5)

(0.5)

(0.3)

0.4

(0.4)

0.0

0.0

Other

 

 

0.0

(0.1)

0.2

(0.3)

0.2

0.0

0.0

Closing net debt/(cash)

 

 

23.2

18.7

(1.1)

14.4

23.0

13.0

(1.0)

Source: Company accounts, Edison Investment Research

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Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

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US

Sydney +61 (0)2 9258 1161

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Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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