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Epwin Group Q&A “at the top of the class” says Zeus Capital (LON:EPWN)

Epwin Group plc (LON:EPWN) is the topic of conversation when Zeus Capital’s Equity Research Director Andy Hanson caught up with DirectorsTalk for an exclusive interview.

Q1: Epwin Group published a half year trading update for the six months ended 30th June, how badly has the company been impacted by COVID-19 in the first half of the year?

A1: Revenues for the first half are down 34% to £93 million against £140 million they did in first half of FY19 so obviously April was a very severe lockdown and then we’ve seen things ease up during May and June.

The impact has been quite severe but very much in line with what we’ve heard from other businesses operating in the same sector.

Q2: Has it, do you think, had enough liquidity in terms of funding because obviously many businesses have needed to raise equity or bank debt?

A2: Yes, that is one of the things that stands out about the company is it has managed its balance sheet through this exceptionally well, it hasn’t needed to raise additional equity, it hasn’t diluted shareholders by needing to do that.

If you look at what’s happened with net debt, yes, we saw an increase in net debt as we went through lockdown but they’ve just indicated that at the end of the first half net debt is about £21 million which is £2-3 million up on where it was last year. Considering we’ve had a period of no revenues coming into the business, that’s a really really strong performance.

They’ve got plenty of liquidity, they’ve got £55 million of additional headroom on that £20 million but importantly today they say they don’t need any waivers for the covenants and the covenants are per-COVID covenants so to come and make that kind of statement is indicative of how well that balance sheet has been managed.

I think it places the company in a very small group of high quality companies that haven’t seen debt on the balance sheet increase materially.

Q3: Just looking at the outlook, how do you view the second half of the year?

A3: Interestingly, if we go back to where we were in March and April time, the company in their FY19 results that came out at the tail end of April gave a couple of scenarios, one that was very pessimistic and one that was slightly more realistic which assumed 100% lockdown in April, 50% in May and 25% in June.

What we’re seeing is a scenario that’s actually much better than that realistic scenario they painted. Revenues in the part of the markets that’s focussed on the RMI – repair, maintenance and improve – spend has actually been exceptionally strong, it was up 10% in June and 12% in July.

The social housing and new build housing has been slightly slower to come through but again, they’re starting to see a really strong pick up in that.

So, strangely I think the outlook for this year is likely to be much better than we maybe had feared back in March/April/May, we are seeing strong demand coming through. I think we are seeing people looking to make improvements on the home rather than spending on a holiday this year, they’re looking to make improvements in the home which seems to be driving goods demand for most of the businesses in this area.

I’m quite optimistic for the second half of this year.

Q4: From what’ve have said, it sounds as if Epwin Group has managed the lockdown period well?

A4: Yes, I think if you’d asked me back in March when we went into lockdown or if you told me that the company would come out of this with net debt under control and demand coming through strongly for the second half of the year, I would’ve taken that back then.

Relative to other companies of its size and operating in a similar industry, the company is certainly at the top of the class.

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