H1/FY2018 represents another period of significant development at Flowtech Fluidpower Plc (LON:FLO). Organic growth of c.9% and the benefit of the Balu acquisition in March for £10.2m, alongside four during H2/FY2017, has seen revenue increase by 65.1% to £56.4m, and operating profit from £4.5m to £5.7m (margin 10.1%). These acquisitions have also driven an improvement in the gross margin by 2% to 36.1%. The Board remains highly confident in the direction of travel and its commercial positioning to capture much further scale within the €12.4bn European fluid power sector. However, the shorter-term focus is firmly on investment that can deliver sustained operational improvements, procurement benefits and wider Group synergies. Our reduced forecasts incorporate increased operational costs associated with this investment and additional overhead from recent acquisitions. We also take a more cautious tone within Flowtech’s OEM-based businesses, including uncertainty on timing over a £1.5m order. Nevertheless, Flowtech continues to trade at a discount to peers on a PER of 11.5x in FY2018E, falling to 10.6x in FY2019E.
Divisional performance – The Flowtechnology (distribution) Division was strengthened with the acquisition of Beaumanor in March, and delivered revenue growth of 21.4% to £23.5m. The statement notes that Beaumanor has traded strongly since acquisition, and this is supported by a stable backdrop across the wider distribution business. PMC has grown revenue by 127.9% to £28.9m and operating profit by 74.7% to £1.9m, with steady progress noted in H1. Management has pointed to a recent softening in some end markets and uncertainty over the timing of a £1.5m order in H2. Elsewhere, the Process Division is noted to have traded well, albeit management remains cautious.
Revised forecasts – Our forecasts see a more cautious outlook in Flowtech’s PMC and Process businesses. In addition, we have included additional overhead associated with recent acquisitions, where management is seeking to drive efficiencies. Our FY2018E PBT is lowered by 7% to £10.7m and net debt from £16.5m to £17.6m. FY2019E PBT reduces by 8% to £12.1m and net debt from £13.2m to £13.9m. A more detailed breakdown is shown on page 4.
Board changes – A separate update today notes that Sean Fennon will retire from his position as CEO immediately and retire from Flowtech in December. Bryce Brooks will move to CEO from CFO. The Board has already appointed a new CFO, Russell Cash, who starts in November. Details on page 3.
Valuation – Despite our reduced forecasts, Flowtech Fluidpower trades at a significant discount to its wider peer group, on a prospective PER of 10.7x. This compares against UK and international peers averaging 16.7x and 14.8x respectively.
