Flowtech Fluidpower Plc (LON:FLO) ahead of interim results next Tuesday (12th September) has announced its fourth acquisition of FY17. Hydraulic Group BV is the first business to be acquired in Continental Europe by the current management team and mirrors the build out of the PMC division in the UK. The business is being acquired for a total EV consideration of £3.4m, £2.1m payable in cash, £700k in shares and c. £600k of debt. In addition, the vendor is being granted 330k options at a 138.7p strike. The acquisition fits with management’s on-going strategy and complements the existing Dutch operations supplying both to the MRO and OEM markets. We increase forecasts to reflect the acquisition with earnings increasing c. 5% in FY18 and FY19. Flowtech’s valuation remains compelling trading on just 9.1x FY18 earnings, the first year the full earnings impact of the acquisition will be felt. This remains a material discount to other UK listed distributors and yields an appealing 4.1%.
Continuing to execute on strategy: The acquisition of The Hydraulic Group (HG) BV is Flowtech’s first foray into expanding the PMC division into continental Europe. It mirrors the growth in the UK and the business is comparable to Nelson Hydraulics, the Irish business acquired in July 2015. With operations in Holland and Belgium, HG offers a relatively low risk first step as it can leverage Flowtech’s existing Benelux distribution operations. In the 12 months to the end of December the business generated £6.7m in revenue and EBIT of £400k. With the potential for cost and revenue synergies, profit contribution should be materially enhanced as part of the larger Flowtech group.
Forecasts: Our forecasts move higher to reflect the contribution from the acquisition. The impact in FY17 is minimal as we are just four months from period end. FY18, the first full year the acquisition will impact, revenue increases c.9% leading to c. 6% increase in PBT and 5% in earnings. The uplift in FY19 is similar. Net debt increases to £11.9m (prev. £9.3m) in FY18 equating to 1.3x EBITDA, this falls to 1.1x in FY18 as the full benefit is felt. Group gross margins improve 50bps in FY18 due to the c.40% margin attained by HG. A summary of forecast revisions is presented in Exhibit 1 below.
Interim results will show continued progress in H1: Tuesday’s interim results should confirm the positive sentiment contained in the recent trading update (10th July) with all divisions performing. Particularly pleasing is the performance in the Group’s core Flowtechnology business, which has seen strong organic growth YOY, despite a challenging market backdrop. This will underpin group margin expectations
Valuation: Trading on a PER of 10.3x current year earnings, Flowtech Fluidpower Plc shares are valued at a sizable 48% discount to UK distributor peers. The discount increases in FY18 as Flowtech’s multiple falls to 9.1x as it benefits from today’s acquisition. Diploma, the closest listed peer in terms of acquisition driven model and quality of earnings based on margin, trades on over 20x year two earnings. In addition, Flowtech offers a yield of 4.1%, again, well in advance of peers.
Sean Fennon, Chief Executive, Flowtech Fluidpower plc commented: “As a Board, we are delighted to add this successful business to the Group’s portfolio. We have, as stakeholders know, wished to enhance our European presence and this opportunity represents the first move internationally for our PMC business. Having got to know that Hydroflex’s culture, model and aspirations near mirrors that of our own, the new skills, customers and end markets introduced will further strengthen Flowtech’s profile, product offering and technical expertise; this will serve us well as we continue to roll-out our strategy of building the leading fluid power group”
