Flowtech Fluidpower Plc (LON:FLO) has announced a good first half trading update with revenue increasing 24.7% YoY to £34.2m (HY16: £27.4m). All business divisions have performed strongly with underlying organic growth complemented by contribution from new subsidiaries acquired over the last 12 months. The performance in H117 increases confidence on the outcome for FY17.The Group has also announced the acquisition of Orange County Limited (OCL), strengthening its Process division in the UK. This is the second deal to be announced since the Group’s £9.6m fund raise in March, following the acquisition of Hi-Power last month. We upgrade our forecasts today to reflect the acquisition with EPS +4.4% and +6.8% in FY17 and FY18 respectively. The Group’s valuation remains compelling; a PER of 10.2x represents a 45.5% discount to sector peers despite the Group’s above average growth, profitability and scope for further accretive acquisitions in the near term. At current levels the shares also offer an attractive 4.1% dividend yield.
Momentum across all divisions: today’s update confirms positive momentum across all divisions, with a particularly pleasing performance in the Group’s core Flowtechnology business, which has seen strong organic growth YOY, despite a challenging market backdrop. Particularly, pleasing from a margin perspective as the core business generates high teen operating margins. Gross margin is in line with market expectation, benefitting from flexible pricing and procurement initiatives. The balance sheet remains strong with headroom to finance further earnings accretive acquisitions; the pipeline of opportunities continues to develop with scope for several transactions to complete in H2. Growth is being supported by investment in the redevelopment of the Group’s shared logistics centre due for completion in September 2017; capacity will increase by 40% delivering greater operation efficiencies for the Group.
Process division strengthened: The acquisition of OCL for an initial £1.5m with an estimated £2.1, of additional earn out, adds scale to the Process division. Founded in 1994, OCL is the UK’s market leader in the supply and distribution of products for the storage and movement of fuels, liquids and gases. The business complements Flowtech’s existing operations and establishes relationships with leading international OEMs, including Brugg Pipesystems and Ebsray Pumps.
Forecasts: Our forecasts move higher to reflect the contribution from the acquisition of OCL. EPS rises +4.4% and +6.8% in FY17 and FY18 respectively. A summary of forecast revisions is presented in Exhibit 1 below.
Valuation: Trading on a PER of 10.2x, the shares are valued at a sizable 45.5% discount to distributor peers, despite Flowtech having the highest forecast 3 year sales CAGR at 15.0%, highest dividend yield at 4.1% and the second highest EBITDA margin of its peer group 13.4%. The potential for notable multiple expansion is complemented by the Group’s acquisition strategy. Management remain confident in delivering further earnings accretive acquisitions in the coming months. A return to 1.5x Net debt/EBITDA implies an additional c.£4.8m of available debt finance (ignoring any uplift in EBITDA from future acquired businesses), giving the Group firepower in a fragmented market.
