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Epwin Group Plc

Epwin Group No respite from cost pressures or operating environment

Epwin Group (LON:EPWN) At the time of the interim results in September forecasts were unchanged with the results stating that profit before tax in FY18 was anticipated to be in line with expectations. Forecasts were heavily H2 weighted in anticipation of a positive impact from price increases and operational efficiencies. We continue to expect a material improvement in terms of operating costs, however, we now assume these to be offset by increased raw material prices particularly PVC resin and glass. This follows on from comments made by others in the sector and leads to a downward revision in gross margin reducing our EPS forecasts by c. 8% across the forecast period. ZC current year estimates move back in line with consensus following today’s cut. In a sector that is cyclically depressed Epwin continues to stand out, trading on 7.1x FY19 earnings.

Raw material price increases continue to impact profitability: At the interims, we were hopeful that price increases combined with operational efficiencies, derived from the continuing site consolidation, would feed through to a substantial H2 weighting in terms of profitability. However, the on-going increase in raw material costs drives a 50bp cut to our FY gross margin, offsetting the improvement in operating costs realised to date. Historically H2 has generated c. 55% to 60% of FY profitability, our previous forecasts had assumed a c. 65% weighting to H2. New forecasts assume a normalised weighting.

Changes to forecasts bring ZC in line with consensus: Revenue estimates remain unchanged, but we reduce FY gross margin by 50bps leading to a c. 2% reduction in gross profit to c.£84.1m. This flows through to a 50bp cut in underlying operating profit equating to a c. 7% reduction to £18.3m (prev. £19.6m). The decrease in gross margin feeds into FY19 and FY20 estimates with EPS declining c. 8% in both years. Dividend per share falls in line with adj earnings as per the updated policy. Prior to today’s revision to forecasts ZC was at the top end of consensus expectations. Our previous £18.2m pre-tax profit forecast compared to £17.7m consensus. The reduction in operating profit, profit before tax and EPS brings estimates in line with the market.

Sector valuations reflect cost pressures and uncertainty in the outlook for the UK consumer: Valuations across the building products sector reflect where we are in the cycle with weak end demand exacerbated by cost pressures. With the outlook for the UK consumer in FY19 mixed at best, it will take time for investors to become comfortable with valuations when forecasts continue to be impacted and the risk to earnings remains high