Epwin Group PLC (LON:EPWN) is the topic of conversation when Zeus Capital’s Director of Equity Research Andy Hanson caught up with DirectorsTalk for an exclusive interview
Q1: Andy, Epwin Group had their interim results out today, what can you tell us about those?
A1: The interim results have been pretty well flagged in their trading update back in August. Trading has been reasonable in the first half and to give you an indication of that, revenues of £149.9 million were up on the £143.3 million the previous year, part of this is due to an acquisition they did last year, National Plastics, a distribution business. Even so, in the current market I can see year-on-year revenue growth has been pretty good, both divisions saw revenue ahead year-on-year, important for the extrusion division which generates very good margins.
Underlying profit was actually down a little bit year-on-year, £11.1 million against £11.8 million and this is predominantly due to the cost input pressures that Epwin Group have seen in the first half, substantially more than they were expecting and certainly I was expecting and I think it’s indicative of what’s going on around the industry at the moment.
So, PBT level, they did £7.5 million against £10.4 million, the was an exceptional in there which relates to the trading issues with Entu but net debt of £28.2 million is only 1 times EBITDA and a good level of cash conversion and the interim dividend was marginally ahead. So, I think the fact that they’ve increased the dividend is a positive statement in what has been a very difficult period and particularly considering the issues that they announced back in August with their 2 largest customers.
Q2: What has happened with the 2 customers?
A2: Firstly, one has gone into administration, Epwin have said it accounts for about 5% of revenue, the trading entities have been bought from the administrator and are continuing to trade and Epwin is still continuing to trade with the entity but doing it solely on a cash basis at the moment. They are taking a £3.9 million exceptional relating to the business going through administration but £2.5 million of this is a cash impact so it’s quite complex what’s going on there.
With regards to the other customer, again it was a distribution business that has been bought by a new owner, the new owner directly competes with Epwin Group so over time, you would expect them to want to replace Epwin’s products with their own. First thing I would say is it’s not easy to do just because a lot of Epwin’s products is specified by the end user, that means that it has to be used. So, it won’t happen overnight but it’s obviously a concern and again, this customer accounts for about 5% of revenue.
Q3: So, what does this mean for Epwin going forward?
A3: We have reassessed our forecasts on the back of this with a bit more detail that we’ve been provided with in the interim results. This year we’ve taken 2.5% off our revenue number so we now think they’ll do £293.5 million, this flows through to a decrease of about 7% in pre-tax profit to £21.3 million.
The impact in FY18 is larger because it will just be the first full year that this comes through so 8% off our revenue number to £279 million and about 19% off our PBT number so that falls from £23.5 million to £19 million.
We expect a recovery in ’19, not solely based on an improvement in the market but more based on the cost-cutting that the management will implement should the revenues not come through from these 2 customers. They will implement cost savings and these will start coming through in ’19 so hence why the profitability begins to return at 19.
Q4: How does this impact Epwin Group’s valuation?
A4: Epwin shares reacted to the trading statement in August and have come back quite far from 90p down to current levels of 70-75p so I think a lot of the downgrade has been factored in by the market. If we look at ’18 which is the trough year for earnings, they’re trading on about 6.7 times earnings and yielding 9% with good cash flow and free cash flow covers the dividend this year and it improves next year so covering FY18 is 1.5 times so I think that 9% yield looks relatively safe. So, the shares do look good value for those people who can take a slightly longer-term view.