Epwin Group Zeus FY22 revenue forecast 3.9% higher

Epwin Group plc (LON:EPWN) traded strongly into the year-end, with FY21 underlying EBIT and PBT ahead of Zeus forecasts by 5.8% and 3.9% respectively. The Group has actively managed significant inflationary pressures and supply shortages, implementing price increases and surcharges where accepted by customers. High cash generation in the period has strengthened the Group balance sheet, bringing covenant net debt (excl. IFRS16 leases) down from 1.3x adjusted EBITDA in FY20 to just 0.4x in FY21. With reduced net debt and over £65.0m of headroom in banking facilities, Epwin is well positioned to execute its expansion strategy. The shares trade on 9.2x FY22 earnings and yield 5.5% with a robust balance sheet, offering significant value in our view.

¨ FY21 results: Revenue of £329.6m was 37% ahead of 2020 and 16.9% ahead of 2019. Underlying operating profit of £18.5m was 5.8% ahead of Zeus forecasts (£17.5m) versus £9.4m in FY20 and £21.2m in FY19. Statutory EBIT in FY21 of £17.7m was 2.9% ahead of FY19 (£17.2m). By achieving strong underlying operating cash conversion (189%), the Group significantly reduced covenant net debt (on a pre-IFRS 16 basis) from £18.5m at FY20 to £9.4m at FY21 year-end, down to just 0.4x adjusted EBITDA (excl. share-based payments and other non-underlying items) from 1.3x in FY20. This is despite £5.3m of cash costs for acquisitions in the year.

¨ Key drivers: Extrusion & Moulding (‘E&M’) revenue increased 31.1% to a record £202.3m in FY21 (+13.9% vs FY19) due to strong RMI demand and price increases. New product launches of PVC decking and aluminium window systems saw significant growth, with demand ahead of Management’s expectations. E&M underlying operating profit increased by 47.1% to £12.2m (6.0% margin), but margins were 4.5pp behind FY19 levels (10.5%) due to the impact of cost inflation, particularly in PVC resin. Gains in market share in the period should improve overall profits going forward once cost and supply issues become less acute. Fabrication & Distribution (‘F&D’) revenue increased by 46.8% to a record £127.3m (+21.9% vs FY19) due to higher volumes, price increases and three value-enhancing acquisitions of regional independent distributors in the period, adding 13 trade counters and increasing the network to over 100. Site consolidation and rationalisation activities in recent years have been a key contributor to increasing operating margins in F&D from 4.4% in FY19 to 6.6% in FY21.

¨ Outlook and forecasts: Revenue so far in FY22 is ahead of 2021 and strong RMI demand is expected to continue. Epwin will need to continue to actively manage cost-input inflation pressures, passing on cost increases to customers where appropriate. Our FY22 revenue forecast is 3.9% higher at £342.8m, but gross margin is now 90bps lower than prior forecasts to reflect the cost inflation and time-lag in putting through price increases. Zeus operating profit and PBT forecasts remain unchanged for FY22 and FY23. The uplift to FY22 operating profit is significant at 16.1%, and the new Telford distribution and finishing facility is expected to deliver further operational benefits and cost synergies in FY23 when the Group is fully moved in.

¨ Valuation: Based on updated Zeus forecasts, Epwin Group trades on 9.2x FY22 earnings. Dividend yield is 5.5% in FY22, which is well supported by low levels of gearing (covenant net debt of 0.4x adjusted EBITDA), offering significant value.

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