A profit warning from Epwin (EPWN:AIM) has investors running for the exit, the market concerned about the company’s ability to pay its dividend.
Shares in the building products company have plummeted 17.1% to 78.75p on a warning results for the year to December 2017 will be ‘marginally below market expectations.'
In April, we flagged Epwin as a resilient company that can deliver a high dividend yield thanks to its limited debt and strong cash generation.
Following today's share price plunge, Epwin offers a yield of 8.6%, based on Zeus Capital's 2017 dividend per share estimate of 6.8p, one which rises to 7p for 2018.
Such high yields can indicate a strong risk of a dividend cut, although Epwin's CEO Jon Bednall says the company’s financial position remains strong and ‘we are confident in continuing our record of strong cash generation and our ability to offer an attractive dividend to shareholders.'
Zeus Capital’s Andy Hanson concurs, arguing the warning won't affect the shareholder reward due to Epwin's good earnings and cash cover.
Forecast free cash flow for 2017 and 2018 stands at £16.4m and £18.9m respectively, while this year's predicted payout is almost twice-covered by Hanson's downgraded earnings estimate of 13.2p.
WHAT HAS GONE WRONG?
Challenging conditions in the repair, maintenance and improvement (RMI) market have been blamed for the profit warning, as well as higher costs for materials.
Unfortunately the issues do not stop there as Epwin says two of its customers, representing 10% of sales, are struggling with their own problems.
One has reported significant funding issues, forcing it to undertake a strategic review, while the other sold its plastic distribution business, which was principally supplied by Epwin.
While Hanson is confident about the dividend, he is concerned about the effect of cost inflation and flat market volumes. This has eroded the benefit of price hikes, leading to a downgrade in pre-tax profit estimates for 2017 and 2018.
For this year, Epwin's anticipated pre-tax profit has been cut by 7.8% to £22.8m, while Hanson downgrades his 2018 estimate by 9.3% to £23.5m.
Panmure Gordon analyst Adrian Kearsey maintains his ‘buy' rating, citing on Epwin’s ‘credible performance’ despite difficult market conditions, though Kearsey reduces his earnings before interest and tax (EBIT) expectations.
He has slashed EBIT by approximately 8% to £23.8m and £24.4m over the next two years.
