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Epwin shows resilience in a soft market, with strong underlying profit despite slightly below forecast revenues. Its share buyback programme extension reflects management’s confidence, but investors should remain cautious due to balance sheet vulnerabilities.

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Epwin (EPWN) delivered a solid performance in its full-year numbers with the underlying profit reaching £25.5mn, a 19% increase YoY. This is an impressive outcome given the challenging conditions in the home improvement market. Although revenues slightly missed consensus forecasts, the company managed to reduce its net debt excluding leases to £14.4mn, less than half of its adjusted cash profit.

It’s worth noting that Epwin is generating a significant amount of cash. The net cash from operations saw a £1.2mn increase to £37.6mn, which has prompted management to continue the share buyback programme initiated in November 2023. So far, £2.3mn have been spent on buying back 3mn shares, with plans to purchase another 3mn shares.

Epwin’s shares have increased by 16% over the past year and are currently trading at a 12-month high. Despite still being 30% below their post-pandemic peak and 45% off their all-time high, the management is confident about using the cash for share buybacks.

Concerns and Market Outlook

Investors should be aware that factoring in leases makes Epwin’s balance sheet appear less secure, primarily due to the substantial amount of intangible assets. With a valuation of eight times forecast earnings, which falls below the five-year average of 10 times, it’s clear that the market is still apprehensive.

The shares are not necessarily a bargain despite their current price, as end markets remain soft. This suggests that while Epwin is performing admirably under the circumstances, prospective investors should approach with caution.

The Road Ahead

Epwin demonstrated resilience in a challenging market, benefiting from a robust cash generation strategy and proactive management tactics. The decision to extend the share buyback programme is a sign of confidence in the company’s future growth, even as the shares trade below their five-year average and end markets remain soft.

However, the balance sheet’s vulnerability when leases are included should give investors pause. This, coupled with the fact that the majority of assets are intangible, presents potential risks. While the price-to-earnings ratio is below the five-year average, it does not necessarily indicate a bargain due to the softer end markets.

A cautious approach is appropriate when considering investment in Epwin at this time.