Is there a golden buying opportunity in these cheap shares?

I’m on the prowl for cheap shares to add to my portfolio in March. The problem is many share prices aren’t as low as they were a few short weeks ago. That’s because the UK stock market has been rising.

The FTSE 100 topped 8,000 points for the first time last week, enjoying its day – or maybe summer? – in the sun after years of underperformance. Likewise, the domestic-focused FTSE 250 has bounced back from its miserable 2022.

So my bargain-hunting has led me to small-cap stocks. And Epwin Group (LSE: EPWN) has caught my eye.

Discounted stock

Epwin is a UK-based door and window manufacturer. It makes and markets PVC and aluminium windows, as well as cladding, decking, and other associated products. The firm supplies the repairs, maintenance, and improvement, new build, and social housing sectors. It has a large network of merchants, plastics stockists, and window and door installers.

Its shares are listed on the Alternative Investment Market (AIM). At 78p a share, the company sports a market cap of £113m.

The share price has declined 26% over the last 12 months. That leaves the stock trading on a price-to-earnings (P/E) ratio of around 8.4. That’s about half the market average P/E, according to my data provider.

Yet there’s nothing in the financials suggesting to me that such a large discount is warranted. Far from it, in fact.

Robust trading

In its year-end trading update published last month, the group reported that revenue increased 8% year on year to approximately £355m. This was largely driven by raising prices to cover cost inflation, as well as bolt-on acquisitions completed in the year, which contributed £4m in revenue.

As a result, the company expects to report annual adjusted profit before tax of about £16.3m. That’s in line with market expectations, and an increase over 2021. 

I’m encouraged that the company is successfully demonstrating its ability to increase prices and preserve profits. After all, it’s no secret that the macroeconomic environment has been challenging for many UK-focused businesses.

The stock pays a dividend, with a current yield of 5.4%.

Optimism and uncertainty

Management also announced that trading in 2023 has remained robust so far. It remains confident of continued profitable growth over both the medium and long term. 

A core part of Epwin’s growth strategy is to complete selective, value-enhancing acquisitions. It’s been busy on that front recently, buying Hampton Decking (a private composite decking company) for around £4m in December. It also acquired PVC-recycling firm Poly‐Pure back in September for an initial cash consideration of £15m.

Of course, the company is facing headwinds operating in a sluggish and uncertain UK economy. But I think that uncertainty is probably already priced into the stock. It may be cheap, but I think there’s value here.

Looking forward, analyst consensus for this year is for over £360m in sales, around £20m in profits, and a dividend of 5.0p per share. If that payout was met, which isn’t guaranteed, that would represent a forward dividend yield above 6%.

All things considered, these cheap shares look attractive enough to go on my March buy list.