The company has been around since the mid-1970s, but only listed on the Alternative Investment Market (Aim) a few months back. Having assessed the investment case, I felt confident enough to recommend buying the shares at the time ('Moulded for gains', 29 Jul 2014). Despite the market rout they have held up pretty well, trading just above the listing price of 100p, even though the FTSE Aim index has slumped 10 per cent in the same three-month period. This resilient performance is wholly justified and partly reflects the fact that the shares were sensibly priced in the first place. They listed on a modest 10.5 times historic post-tax earnings.
But that's not the only reason because the business also offers an interesting growth angle through its exposure to the repair, maintenance and improvement (RMI), new-build property and social housing sectors. The RMI segment accounts for 70 per cent of Epwin's sales with new-build making up the balance, the vast majority of which are generated in the UK. This makes the company a cyclical play on both the domestic economy and housing market, both of which have been recovering strongly.
Thirdly, Epwin's anticipated profit growth over the next few years is benefiting from a strong tailwind of cost savings: analysts at research house Edison Investment Research believe about £1m of annualised savings will be squeezed out from Epwin's Window Systems business this year and £3m from an improved distribution and logistics base. This helps explain why Epwin's underlying operating profit surged more than 20 per cent to £7.3m on a modest rise in sales in the first half as operating margins jumped by almost one percentage point to 5.7 per cent. Analysts expect a similar outcome in the second half to drive up underlying pre-tax profit by a quarter to £17.8m and lift EPS to almost 11p. On that basis, the shares are priced on little over nine times earnings estimates.
The fourth reason for my positive view is the yield attraction. The board have committed to declaring a dividend of 4.24p a share for the 2014 financial year, rising to 6.37p a share in 2015. The half-year payout of 1.41p for the first half was declared in last month's financial results and is paid on Friday. So, at the current price of 104p, the prospective yields are 4 per cent and 6.1 per cent, respectively, for this year and next. That's attractive for income seekers looking for a well covered dividend. And Epwin is not overly gearing up its balance sheet to generate its earnings as pro-forma net debt is around £10.5m, or a fifth of shareholders' funds.
Offering investors a lowly-rated and high-yielding play on the UK economy and housing markets, those half-year results clearly show that Epwin is delivering the profits analysts had predicted when the company floated. In the circumstances, I continue to rate Epwin's shares a decent income buy and maintain a target price of 140p.
Please note that I have written two other columns today, both of which are available on my IC homepage...
I have also written three articles in the past week on financial markets:
Equities: Eurozone growth scare spooks investors (13 October 2014)
Monetary policy: Normalisation is coming so plan ahead (17 October 2014)
Bond markets: Lessons to learn from bond market flash crash (17 October 2014)
■ Simon Thompson's 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 stockpicking'
