High-yield Epwin looks too cheap

The company, which floated on Aim last July, specialises in manufacturing low-maintenance building products such as guttering, doors and windows. About 70 per cent of revenues are generated from the repair, maintenance and improvement market (RMI), with the rest split between the private new-build and social-housing markets. The company is the largest overall supplier of PVC products to the UK building industry and operates from 10 sites, with products mainly distributed through stockists, installers and fabricators selling directly to larger building groups.

The RMI market looks interesting at the moment. While it proved to be far more resilient to the downturn that crippled the housebuilding market, RMI has been slower to recover, but there are now encouraging signs that it is ready to make up ground as the economy improves. Specifically, demand for products such as double glazing units is growing. According to the Office for National Statistics, of the 27.8m homes across the UK, only 60 per cent are maintained to a satisfactory level. In addition, less than 2 per cent of window frames are replaced each year and this rate is expected to accelerate significantly as existing window frames reach the end of their life cycle. The outlook for the new-build market is also good and Epwin already supplies six of the top 10 housebuilders. That said, new-build margins tend to be lower due to reduced bargaining power.

Epwin plans to make the most of the robust end-market conditions by widening the range of products it supplies. It is also benefiting from environmental regulation with products such as rainwater and drainage equipment. Meanwhile, there is scope to boost profitability and the company has been busy exiting unprofitable lines of business. Cost savings are also continuing to come through from its 2012 merger with Latium. Integration was delayed by a Competition Commission review and broker Cantor Fitzgerald reckons a further £1.6m of synergies can be realised this year. In addition, a reorganisation at the group's fabrication and distribution business, which accounted for 45 per cent of last year's group sales, meant the division's margins dropped from 5.1 per cent to 3.9 per cent in 2014. But there are hopes profitability will bounce back this year. Cantor thinks this could produce a £1.3m profit boost.

Finances are strong. Cash generated from operations last year grew by more than 50 per cent, helping to turn the previous year's £18.7m net debt into a net cash position. That helps support forecasts of attractive and well-covered dividend payments. It also means there could be scope for earnings-enhancing acquisitions to take the company into new product areas.