Time to exit Epwin

Epwin (EPWN) manufactures and distributes ‘low maintenance’ building products such as PVC windows and doors and cladding. Around 70 per cent of total sales come from the repair, maintenance and improvement (RMI) market, with 20 per cent from new builds and the rest from social housing. Since 2015, the group has consistently described RMI market conditions as “challenging”, “lacklustre” and “subdued”. A useful gauge for the RMI market, data from the Builders Merchants Federation indicates three consecutive quarters of negative sales growth from builders’ merchants in 2019. Storms Ciara and Dennis are likely to have caused disruption to the market in 2020. With Epwin’s projected earnings and margin growth already sluggish (see chart), there could be an uphill struggle ahead.

As a cyclical business, performance in the six months to 30 June reflected the Brexit-induced construction slowdown. Revenue was flat at £140m as Brexit stockpiling in the first quarter preceded customers winding down inventories. A January trading update revealed weaker market conditions in the second half of the year, leading house broker Zeus Capital to trim its full-year forecasts.

It has been tough going for a number of years. Higher input prices caused by sterling weakness against the euro and US dollar saw £10m in annualised material cost inflation in 2017 and 2018. This weighed on the adjusted operating profit margin, which declined from 8.7 per cent in 2016 to 6.7 per cent in 2018. Compounding its struggles, it took a £27.4m revenue hit from the loss of its two biggest customers in 2018 – Entu fell into administration while SIG (SHI) sold its plastics distribution business to a competitor.

Material costs were described as “stable” in the first half of 2019 and product price increases finally came through, helping lift like-for-like underlying operating profit by 11 per cent to £8.3m. The first-half margin rose 0.6 percentage points, but remains low at 5.9 per cent.

The group has spent £8.1m since 2014 on rationalising its operations and consolidating manufacturing capacity to trim the cost base. The first half of 2020 will see its window finishing and warehousing footprint condensed from seven units to two including the sale and leaseback of a new facility. Expecting an £8m cash surplus from this process, net debt (excluding lease liabilities) will fall from £29.2m at the half-year stage to £16.4m by the 2019 year-end, equivalent to 0.6 times adjusted cash profits (Ebitda).