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OPINION

Moulded for gains

Moulded for gains
July 29, 2014
Moulded for gains
IC TIP: Buy at 103p

Originally one of the first PVC-U window fabrication businesses in the UK, Epwin’s businesses now sell a much broader range of low maintenance building products. The company’s fabrication operation developed into a window profile systems manufacturer, before widening its range of products to include: cellular roofline and cladding extrusions; rainwater and underground moulding and extrusions; GRP and thermoplastic doorsets; and glass sealed units.

In terms of the revenue split, building products accounted for 42 per cent of the company’s sales last year, building components around a third, and the balance was made up by manufacturing systems for windows, doors and conservatories. The end market exposure is primarily to the RMI segment (around 70 per cent of sales) with new build accounting for the balance (30 per cent). All bar 5 per cent of revenues are domestic, so this is a cyclical play on both the UK economy and the housing market in particular. This is primarily why the company is of interest to me at this point of the economic cycle and the ongoing housing market boom.

According to research from property consultancy Savills, UK housebuilding output is set to rise from 108,000 new builds last year to around 167,000 homes in 2018. This should help underpin demand for Epwin’s products as will improving demand from the RMI market which returned to growth last year. I expect both trends to remain positive given the strengthening UK economic recovery. In fact, the International Monetary Fund (IMF) has just upgraded its GDP forecasts for this year and next and now predicts growth of 3.2 per cent and 2.7 per cent, respectively, making the UK one of the world's fastest expanding major economies.

The positive economic and industry back drop aside, which is providing a decent tailwind for sales, the company offers potential to boost its market share in specific areas such as rainwater and drainage products, and target geographic areas where it is under represented in new build and social housing. Post the Latium merger, more focused cross selling between the company’s enlarged portfolio of 24 major brands is another obvious way to boost revenues.

There is operational gearing in the business too as Epwin has additional capacity in its manufacturing and warehousing network, so any additional revenue generated is likely to improve profit margins. Costs savings from the merger are also feeding through to profits. In fact, analysts at research house Edison believe there is about £1m of annualised benefits to reap from Epwin’s Window Systems business this year and a further £3m from an improved distribution and logistics base. This should in turn feed through to a chunky increase in operating margins, a fact not yet factored into the company’s valuation.

 

Attractive valuation

Having waded through the company’s admission document, and adjusted the company’s reported profits to take into account exceptional items and amortisation of goodwill and intangibles, Edison calculate that Epwin made underlying pre-tax profits of £14.4m on revenues of £264m in the financial year to end December 2013. So at the float price of 100p, Epwin is being valued on 10.5 times historic EPS of 9.6p to command a market capitalisation of £135m.

Factoring in the merger benefits above, Edison believe that the company is capable of making pre-tax profits of £17.8m this year, around 24 per cent higher than in 2013. This means we are virtually guaranteed a good news story when Epwin reports its interim results in September. Moreover, adjust for the extra shares in issue following a £10m fundraise for the company at flotation, which reduced net debt to £8.7m, well within committed new banking facilities of £30m (maturing in 2019), and adjusted EPS are forecast to rise to almost 11p this year.

On this basis, the shares are rated on a forward PE ratio of 9, a significant discount to other fabricators such as Howden (HWDN: 326p) rated on 16 times current year earnings estimates, and PVC window company Safestyle (SFE: 175p) which trades on around 11 times. Travis Perkins (TPK: 1620p), a company which has similar characteristics in terms of distribution in the sector, is rated on 13.5 times earnings, or a 50 per cent higher earnings multiple than Epwin.

There are yield attractions for income seekers too. That’s because the board have stated that it will pay a dividend of 4.24p a share for the 2014 financial year, rising to 6.37p a share in 2015. On this basis, the shares offer a sector beating yield more than double that of both Howden and Travis Perkins. Epwin’s shares also offer a higher dividend yield than Safestyle, a company I am very favourable on which itself offers a prospective yield of 5 per cent this year, rising to 5.5 per cent.

Importantly, there are no financial concerns to be worried about. Net debt is less than 20 per cent of Epwin’s proforma net asset value of £46.6m.

 

Solid investor base

It’s worth noting that two of the previous owners, Andrew Kennedy and Brian Rawson, still retain 15 per cent each of the issued share capital, post flotation. This guarantees that they have a vested interest in the business. Other major shareholders include Schroder Investment Management (12.44 per cent shareholding); Henderson Global Investors (9.77 per cent); Premier Asset Management (8.52 per cent); Unicorn Asset Management ( 8.52 per cent); AXA Investment Management (7.22 per cent); Ruffer LLP (4.59 per cent; and Chelverton Asset Management Limited (3.52 per cent). In other words, around 55 per cent of the issued share capital is held by seven asset managers, so providing a stable shareholder base.

It also means that with only 15 per cent of the shares outside the control of these nine major shareholders, any good news is likely to have an accentuated impact on the share price. That’s something well worth considering given that Epwin is scheduled to announce its interim results within the next couple of months and has already stated in the Aim admission document that trading in the year to date has been in line with the board's expectations.

It’s also reassuring that chief executive Jon Bednall was previously finance director of Epwin, having been recruited to that position in 2008. He devised and managed the merger with Latium, so should have a handle on both the finances and the operations. Group finance director Chris Empson has been with the company for two years, having previously been a divisional finance director at support services group Rentokil Initial. Commercial director Shaun Hanrahan has been with Epwin for the past 14 years, so the senior management team all have valuable industry experience, not to mention a fine grasp of Epwin’s businesses.

 

Target price

In my opinion, Epwin offers an attractive way of playing the strengthening UK economic recovery, a recovering RMI market and is a geared play on the new build market. And the good news is that the shares are only trading marginally above the price major institutions bought shares at in last week’s flotation. They are also underpriced on only 10.5 times this year’s earnings and offer a 4 per cent plus yield that is set to rise sharply in 2015.

From my lens, a fairer valuation is a rating of nearer 13 times earnings for 2015, implying a share price of 140p, and one underpinned by a 4.5 per cent forward dividend yield. On a six-month basis, I rate Epwin shares a decent income buy.

■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'