Epwin: Value or Value Trap in Housing?

Friday, Jul 28 2017 by

I am pondering whether or not to invest in the construction-related small-cap Epwin (LON:EPWN), which has a market cap of £134m.

This manufacturer of PVC frames for doors, windows and fascia (including cladding, guttering and decking) fits my quantitative criteria for deep value, with a Stockopedia composite Value rank of 95 out of 100.

                                             Figure 1: Epwin high Stockopedia Rankings


Value attractions: EV/EBITDA under 5x, P/FCF under 10x, 7.3% dividend yield

Most of the key valuation ratios are very cheap relative not only to the market, but also to Epwin’s direct quoted competitors in the construction space such as Safestyle UK (LON:SFE) and Eurocell (LON:ECEL).

                                              Figure 2: Epwin valuation ratios look cheap


The high 7.3% dividend yield is backed by a free cash flow yield of over 10%, while one pays a EV (Enterprise value)/Sales multiple of 0.5x for an operating profit margin of over 8%.

The low EV/EBIT valuation is a strong contributor to Epwin’s 97% Magic Formula score, giving it an A+ score. So far, so good then.

Quality also high: driven by strong return on capital and free cash flows

The 90 Quality rank is attractive too, with a relatively high Piotroski F-score of 7, high return on capital and solid free cash flow at c. 10% of market cap generated per year in 2014, 2015 and 2016.

There is still some net debt on the balance sheet of £21m, but this represents only a net gearing level of 23%, which is comfortable.

Broker view (Edison Research): internal improvements to fuel positive profitability trend

Edison Research (analysis paid for by the company) seems to give a cautiously positive outlook on Epwin (but should perhaps be taken with a large pinch of salt):

Trading in the first four months of FY17 has been in line with management expectations and our estimates are unchanged. In flat RMI markets, Epwin is focusing on operational improvements (eg in fabrication) and marketing initiatives (eg branding and range development of window systems and canopy products, plus greater co-ordination across group companies). H117 will benefit from an extra five months of National Plastics trading…

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My opinions only, not investment recommendations: Please Do Your Own Research

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Epwin Group Plc is a manufacturer of extrusions, moldings and fabricated low maintenance building products, operating in the repair, maintenance and improvement, new build and social housing sectors. The Company operates through two segments: Extrusion and Moulding, and Fabrication and Distribution. The Extrusion and Moulding segment is engaged extrusion and marketing of polyvinyl chloride-unplasticized (PVC-U) window profile systems, PVC-UE cellular roofline and cladding, rigid rainwater and drainage products and wood plastic composite decking products. It operates from extrusion and molding facilities in Telford, Tamworth and Scunthorpe, among others. The Fabrication and Distribution segment is involved in fabrication and marketing of windows and doors, distribution of cellular roofline, rainwater and drainage products, and manufacture of glass sealed units. It operates from over five window and door fabrication sites, and approximately two glass sealed unit manufacturing sites. more »

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Safestyle UK plc is a United Kingdom-based company engaged in the sale, manufacture and installation of replacement un-plasticized poly vinyl chloride (PVCu) windows and doors for the United Kingdom homeowner market. The Company's segment includes the sale, design, manufacture, installation and maintenance of domestic, double-glazed, replacement windows and doors. The Company has over 30 sales branches and approximately 10 distribution depots located throughout the United Kingdom. Its product range includes EcoDiamond WINDOWS, EcoDiamond UPVC DOORS, EcoDiamond BI-FOLD DOORS, EcoDiamond REPLACEMENT CONSERVATORIES, GuardDoor, Pavilion and Inspire. It has manufactured over 279,000 frames and carried out approximately 60,000 installations. The Company's subsidiaries include Style Group Holdings Limited, Style Group Limited and HPAS Limited. more »

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Eurocell plc manufactures, distributes and recycles unplasticized polyvinyl chloride (UPVC) window, door, conservatory and roofline systems. The Company is engaged in the extrusion of UPVC window and building products to the new and replacement window market, and the sale of building materials across the United Kingdom. It operates through two segments: Profiles and Building Plastics. The Profiles segment includes extrusion and sale of UPVC window and building products to the new and replacement window market. It supplies UPVC systems, such as Modus system, inline patio doors, bi-fold doors and cavity closers to fabricators and installers. The Building Plastics segment includes sale of building plastic materials. It operates under the Eurocell brand. It sells and distributes a range of products manufactured by the Company and branded PVC foam roofline products, and third party manufactured ancillary products, including windows, doors, sealants, tools and rainwater products. more »

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  Is LON:EPWN fundamentally strong or weak? Find out More »

4 Posts on this Thread show/hide all

Julian Rowe 17th Aug '17 1 of 4

I trust the pondering whether or not to invest in this stock is over - the stock having dropped 20% over profit warning for end of year (31 Dec), Since the AGM the Group has noted changing circumstances within its customer base affecting two of its customers, each accounting for around 5% of the Group's revenue. One has significant funding issues and is undertaking a strategic review, whilst the other has sold its plastic distribution business which is principally supplied by Epwin, to a competitor of the Group. The implications, if any, of these matters remain unclear at this stage.

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smatthews1 18th Aug '17 2 of 4

After pondering over this one myself, I have to be disciplined and sit on the side lines. As you mention they have just lost 10% of their revenue. Also they have reported for some time now that the RMI market has been flat, and they are also mitigating some of their prices due to the weak Sterling.

I quite liked the company at these levels but there's to many negatives for me at the minute.

A recovering strong RMI market would tempt me back in, but I'm not sure what the catalyst will be for this.


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Howard Marx 18th Aug '17 3 of 4

There's no asset backing here (Price/Tangible book 6.5x) so we're left to assess Value on metrics from the P/L account.

For cyclical stocks, Ben Graham would have advised looking at a 10 year average of net profit rather than the latest number, which may well prove to be a cyclical peak.

2012-2016 the average net profit for Epwin (LON:EPWN) is 40% lower than last years number. Hence all of the other Value ratios are not as attractive as they appear.

I guess the real headwind for the company is not just a possible demand slowdown but also supply (pricing) pressures resulting from growth in industry capacity.

So for me this is a 'cheap' stock that will likely remain cheap other than in the event of some corporate action.

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pone 1st Nov '17 4 of 4

EPWN.L looks interesting. So in a comparison to Safestyle I note the following:

* Safestyle has revenue growth whereas EPWN is stagnated on revenue. I think Safestyle is stealing market share with their higher marketing spend.

* Despite stagnant growth of revenues, EPWN has faster operating income growth. Those are probably just operating efficiencies, so they are not likely to continue.

* Safestyle has better operating and free cash flow growth, which is suggesting to me that EPWN's earnings growth may be an accounting maneuver that doesn't come through to cash.

* Safestyle is basically incapable of bankruptcy. EPWN has enough debt that in a severe recession they might have stress.

* Safestyle has much better earnings metrics: ROA, ROE, and ROIC are all about double EPWN.

EPWN has a price to sales of only about 0.4. Seems very cheap here. I am inclined to let a recession develop and see where the shares go, but I am believing that maybe around a price to book under 0.8 that it might be close enough to a bottom to make it worth a shot.

Am I missing something major here?   What about customer risk?   What percentage of EPWN's customers are consumers and what percentage are large accounts?   Maybe there is a financial stress issue with one or more of their large accounts?

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