There was good news from small-cap stock Epwin (LSE: EPWN) today. In the full-year results report, the low-maintenance building products maker declared the restoration of shareholder dividends.
I’ve written about the stock several times over the past few years. And the main attractions have always been a cheapish valuation and a high dividend yield. But with the share price near 97p, the forward-looking yield for 2021 is as low as about 2.8%.
This small-cap stock’s business is bouncing back
The figures in today’s report show what a thump the business took from the pandemic. Revenue declined by almost 15% in 2020 and adjusted earnings per share collapsed by just over 61%. But the worst figure, in my view, is that net debt rose from just over £80m to almost £97m.
Epwin must do a lot of profitable trading in the good times that are hopefully coming if it is to pay down that big load of borrowing in time for the next economic downturn. I wouldn’t want to see the business plunge into another recession this top-heavy with debt.
And perhaps the biggest problem with the stock is that underlying operations are cyclical. Epwin makes and supplies PVC, doors, windows, cladding, guttering, decking and other stuff for the new-build and maintenance markets. And the industry is notorious for its cycles of boom and bust.
But in fairness, the business is bouncing back from the challenges of 2020. Revenue in the second half of last year came in 4% higher than the 2019 figure. And underlying operating profit was just below that of 2019. The directors reckon demand is recovering fastest from the renovation, maintenance and improvement market. The company is seeing a slower return to normal levels of demand from the new-build and social housing sectors.
Strong revenue but earnings falling short
However, despite forecasting a triple-digit percentage rebound in earnings for 2021, City analysts still expect them to fall well short of 2019’s level. But despite that, the share price is already near its 2019 peak. And I see that as a negative when considering the stock now.
But maybe there’s a good reason for the strength of the shares. The company reckons the 2020 H2 business recovery has continued into 2021 “with stronger than anticipated demand” in the first quarter. The directors said revenue is beating 2019’s performance.
However, its supply chains are “under pressure” because of the pandemic and the acceleration of demand that has emerged now. There are some shortages of PVC raw materials and the price of resin has been driven up to all-time highs. Epwin is aiming to recover its extra costs by raising selling prices to customers.
Although I think there’s a long-term tailwind behind the infrastructure and building markets, I’ve cooled on Epwin. It’s possible the business and the stock could embark on a multi-year climb from here. But neither the financial record nor the shares have progressed much overall for the past six or seven years. So I’m looking elsewhere for long-term small-cap stock opportunities.