Flowtech Fluidpower Plc (LON:FLO) has announced its fifth major acquisition and sixth in total this year. Group HES Ltd has been acquired to continue the build out the PMC division adding c. £10.0m in revenue. This follows the recent addition to the division of Hydraulic Group BV, the first acquisition by the current management team in mainland Europe. On a normalised basis, Flowtech has paid c.6x trailing EBITDA, in line with its stated strategy and other completed deals. The £4.1m consideration is being settled with £3.1m in cash and £1.0m in shares, equating to the issue of c.670k new shares. Forecasts increase reflecting the addition of HES with revenue increasing c.12% and PBT c.7% in both FY18 and FY19. Flowtech continues to trade at a discount to other UK listed distributors at sub 10x FY18 earnings, the first year the full earnings impact of today’s acquisition will be felt. Should the valuation discrepancy continue as the business grows Flowtech could become an attractive acquisition target for a larger distributor.
The acquisition: HES trades through the brands Hydraulic Equipment Supermarkets and Branch Hydraulics and has recently established specialist distributor brands. The business will eventually be integrated into the PMC division taking the divisions revenue to c. £50m, larger than the core distribution business. HES is complimentary to the existing PMC operations and will extend the technical offering whilst deepening the relationship with important suppliers. The headline EV of £4.9m includes £0.5m of debt relating to a large project in the installation stage. Post completion net debt is expected to revert to a normalised level of c. £0.1m. On the adjusted net debt, the price paid equates to c.6x EV/EBITDA.
Forecasts increase: Our forecasts move higher to reflect the contribution from the acquisition. The impact in FY17 is minimal with less than a 1% increase in earnings, as we are less than three months from period end. FY18, the first full year the acquisition will impact, revenue increases c.12% leading to c.7% increase in PBT and 5% in earnings. Group gross margins decrease marginally, 30 bps, due lower margins at HES. The uplift in FY19 is similar. Net debt increases to £14.0m (prev. £11.9m) in FY18 equating to 1.5x EBITDA, this falls to c.1.1x in FY18 as the annualised earnings benefit from the acquisition is felt. A summary of forecast revisions is presented in Exhibit 1 below.
Q3 trading update: Flowtech Fluidpower plc is scheduled to provide the market with a Q3 trading update on the 17th October. Whilst the operating environment will inevitably have remained tough we expect Flowtech to have continued to outperform that market.
Valuation: Trading on a PER of 11.5x, current year earnings, falling to 9.8x in FY18 Flowtech’s shares offer value relative to UK listed peers. The 3.7% yield is also attractive and well covered by earnings. The business could become an acquisition target should the valuation gap not close as it grows.
