A pre-close update confirmed that trading for the 2015 fiscal year is bang in line with analysts' expectations; analyst Toby Thorington at Edison Investment Research forecasts a 6 per cent rise in full-year pre-tax profit to £19.3m and EPS of 11.6p. This mainly reflects costs savings and improved gross margin as Mr Thorington predicts flat revenue of £258m in the 12-month period. Epwin generates 70 per cent of its revenue from the repair, maintenance and improvement market (RMI) by supplying exterior PVC building products (windows, doors, roofline and rainwater goods) into several UK market segments, but its markets have yet to pick up, hence the lack of top-line growth.
However, with operating cash flow strong and net debt only £2.2m at the end of June 2015, down from £9m at the time of the flotation in the summer of 2014, and well within a £25m revolving credit facility that runs until July 2019 and a £5m overdraft facility, Epwin is able to drive earnings higher even in lacklustre markets by making earnings accretive bolt-on acquisitions that fit into its existing product portfolio. And this is exactly what the board is doing, having just announced the acquisition of Wrexham-based Vannplastic, trading as Ecodek, a leading manufacturer and supplier of wood plastic composite, the primary use being a hardwood substitute for balconies and outdoor decking.
It's a highly profitable business, too, having posted operating profit of £600,000 on revenue of £4.1m in 2014. Based on guidance that Ecodek will report fiscal 2015 cash profit of £1m, the deal is expected to be earnings enhancing for Epwin in 2016 given that the consideration of £5.2m, of which £3.64m is payable in cash and the balance being shares issued at a price of 133.7p, represents a multiple of 5.2 times cash profit. There is a maximum earn-out of £3.3m based on Ecodek's financial performance next year. For this to be paid in full, the business would have to lift its cash profits by two-thirds to £1.66m, a material increase on forecasts for 2015.
Modest rating and decent yield
Edison is taking a prudent view at this stage, pencilling in a pre-tax profit contribution from Ecodek of £0.65m in 2016, rising to £0.75m in 2017, implying group pre-tax profit of £20.8m in 2016 and EPS of 12.3p. On that basis, Epwin's shares trade on just over 11 times 2016 fiscal earnings estimates, and offer prospective dividend of yields of 4.6 per cent and 4.8 per cent, respectively, for fiscal 2015 and 2016.
True, the share price has pulled back from an all-time high of 147p in mid-August as investor sentiment cooled somewhat towards the RMI market. However, with the UK domestic economic recovery robust, interest rates low, consumer confidence high, and annual real wage growth ticking up to 3.3 per cent in the private sector, then I feel that investors are being overly cautious as there is scope for the UK economy to surprise to the upside in the coming 12 months. This would be beneficial to the RMI market Epwin caters for.
So, having recommended buying Epwin's shares when it listed on the Alternative Investment Market at 100p a share in the summer of 2014 ('Moulded for gains', 29 Jul 2014), and advised running profits at 134p in June ('Soaring small caps', 24 Jun 2015), and at 138p seven weeks ago ('Income plays with capital upside', 1 Oct 2015), I can still see upside if the board continues to make selective and well received earnings-enhancing bolt-on acquisitions. With this thought in mind, it's worth flagging up that Edison predicts year-end net debt of only £1.1m, so the board certainly have the funding available to finance more opportunistic acquisitions.
Trading on a bid-offer spread of 135p to 138p, I would continue to run profits.
Please note that I have written two other columns today, both of which are included in the list below.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies in the past three weeks:
■ MS International: Buy at 180p, initial target price 240p ('Making waves', 19 October 2015)
■ Pure Wafer: Buy at 175p, new target 200p ('Valuation anomaly worth exploiting', 20 October 2015)
■ Greenko: Hold at 87p, new target 100p ('Greenko's cash return', 20 October 2015)
■ Elegant Hotels: Buy at 108p, target range 130p to 135p ('An elegant investment', 20 October 2015)
■ BP Marsh & Partners: Buy at 157p, target 180p ('Cash-rich value play', 21 October 2015)
■ Crystal Amber: Buy at 170p; Dart Group: three month trading buy at 468p; Grainger: three month trading buy at 247p; Leaf Clean Energy: await news on Invenergy asset sale ('A quadruple play', 22 October 2015)
■ UTV Media: Buy at 184.5p, target 215p ('On the right wavelength', 26 October 2015)
■ Globo: shares suspended at 28p ('Globo bombshells', 26 October 2015)
■ Globo: shares suspended at 28p ('The truth about Globo', 29 October 2015)
■ Getech: Sell at 38p ('Getech warns', 3 November 2015)
■ Redde: Run profits at 178.5p; Trakm8: Run profits at 250p; 32Red: Run profits at 95p; Manx Telecom: Run profits at 208p; Burford Capital: Run profits at 189p ('Five companies that keep on delivering', 3 November 2015)
■ Gresham House: Buy at 345p, 12-month target price 450p ('Sowing the seeds for growth', 9 November 2015)
■ Inland: Run profits at 73p, target 80p ('Tapping into hidden value', 9 November 2015)
■ K3 Business Technology: Run profits at 361p ('In the money, 9 November 2015)
■ Fairpoint: Run profits at 190p, target range 200p to 220p ('Riding a seven year high', 10 November 2015)
■ KBC Advanced Technologies: Buy at 129p, new target range 160p to 169p ('Running oily gains', 10 November 2015)
■ Epwin: Run profit at 138p ('Decked out for further gains', 10 November 2015)
■ 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
