The stock market likes today’s half-year report from Epwin Group (LSE: EPWN), which is a relief because the figures are dire. The share price is up around 8% as I write, which goes to show that market movements are all about investor expectations, and the firm’s performance had previously been well-flagged by the directors. Meanwhile, the medium-term outlook is encouraging, and Epwin is interesting because of its low valuation, so let’s dig in to see if the stock could make a decent investment from where we are now.
A long history of trading
Epwin manufactures and supplies PVC windows, doors, fascias, cladding, guttering, decking and prefabricated GRP building components and has been around since 1976. It started out as “one of the first” PVC-U window fabrication firms in Britain and has grown organically and by acquisition to become the beast that it is today operating from “a number” of locations in the UK.
The directors claim that the brands the firm has developed and acquired are market-leading and help to “maximise the sales opportunities” in the “diverse and fragmented” repair, maintenance and improvement (RMI) and new-build markets. But brands such as Profile22, Spectus, Swish, PatioMaster, Permadoor, ecodek and Tempest are probably not household names, even though they might be well known in the industry.
There will be a lot of cyclicality in the business because of the markets the company serves, and I reckon that shows up in the record of cash flow over the past few years, which wiggles up and down. Today’s report revealed that revenue slipped 5% compared to the equivalent period last year, but underlying operating profit slumped 36%, and adjusted earnings per share plummeted 42%. I think the firm’s difficulties show up most in the figure for the underlying operating margin, which fell by 32%. When faced with such a poor financial performance it’s no surprise that the directors cut the interim dividend by almost 24%.
The medium-term outlook is positive
Prior to the period, Epwin lost two large customers, but revenue held up better than the directors expected. But inflation around materials and labour ate into profits and the firm is introducing price increases to address the problem. On top of that, the company is engaged in a lot of nipping and tucking of operations aimed at reducing its cost base and improving operational efficiency – all actions you would expect when profits decline.
Looking forward, the company sees weak consumer confidence in the short term leading to ongoing “lacklustre” market conditions. But the medium-term demand for the company’s products will likely be driven by today’s under-investment in existing UK housing stock and an ongoing buoyant market for new homes. On top of that, the directors expect “greater weighting of profit towards the seasonally busier second half of the year than in more recent years.” I read chief executive Jon Bednall’s comments as being optimistic. He said he is confident in the long-term prospects for the RMI market and Epwin will continue its strategy of improving operations, developing and expanding its range of products, and seeking acquisitions. I reckon today’s low valuation and high dividend yield look attractive.
