Flowtech Fluidpower plc A strong performance across all divisions

Flowtech Fluidpower plc (LON:FLO), the AIM listed specialist technical fluid power products supplier issued the following unaudited Q3 Trading Update for the nine-month financial reporting period ended

30 September 2017:

GROUP TRADING UPDATE

Group revenue during the first nine months of the current year increased by 34.4%. Our strong performance is being driven by continued momentum across all the business divisions and further enhanced by the contribution from new subsidiaries.

Since reporting our HY1 2017 results and market update in early September the business has experienced a solid trading period which remains in line with market expectations. Of note is organic sales growth in the Q3 period of 12.4%. The comparative quarter in 2016 reflects the period immediately following the June Brexit vote when markets and currencies softened, and consequently a strong rebound was expected. However, it is pleasing to report that combined with this expected uplift we delivered further organic growth through a mixture of price increases and strong volume gains at consistent gross margins – this is further evidence that our multi-channel strategy is gaining traction.

ACQUISITONS

Since the start of this financial year we have concluded six acquisitions of which, the following three were concluded during Q3:

· UK: Orange County (OCL) and Group HES

· Europe: Hydroflex Hydraulics (Hydroflex)

These acquisitions have all added or enhanced the Group’s position with key European and global suppliers (such as Eaton Corporation, Danfoss Power Solutions, Parker Hannifin, Brugg Pipesystems and Ebsray Pumps), broadened our sector and geographical coverage, and added to our technical competence. Our four-channel approach to the creation of a fluid power specialist group is continuing to present further prospects for expansion, and the Board believes that the Group can continue to exploit this “pipeline” in both the short and medium term, whilst at the same time ensuring that net bank borrowings remain well within facilities.

INVESTMENT FOR THE FUTURE

By way of an update since the HY Report, the redesigned Shared Logistics Centre in Skelmersdale is now expected to be completed by the end of October. As well as modernised office and conference facilities, the enhanced layout will offer an increase in capacity of around 40% and, will deliver operational and stocking improvements for use by all our Profit Centres. It will also provide considerable scope for both the profitable integration of future acquisitions to the Group, and provide scope for further organic growth within the current portfolio. The process has been completed with no disruption to the market leading service level offered by the Skelmersdale operation. At the date of this announcement, we are currently working towards securing a dedicated new site in Knowsley, on Merseyside for our Shared Engineering Centre. This initiative when launched will enhance the Primary Fluid Power operation based nearby and underpin our objective of creating a Centre of Excellence and become recognised as a complete service provider to the fluid power sector. As we announced last week we are also to officially launch our Onsite Services Division in 2018.

SUMMARY

Our focus remains growth through both acquisitive and organic means backed up by our four-layered approach to extracting synergistic benefits over the short, medium and long term. This targeted approach ensures we can achieve both a concentration and enhancement to our product set which is the core of our business model.

Flowtech Fluidpower plc board believe that the acquisitions so far, this financial year clearly reinforce the ongoing strategy to develop a focused Fluid Power Group that serves a wide number of industry sectors, allowing a de-risking of some of the cyclic nature of the business.

The Group’s current performance will deliver another year of solid progress. As a business, we are confident in our strategy, commercial opportunities and the prospects of the Group and, the business remains on track to meet current market expectations for the year ending 31 December 2017.

ZEUS COMMENTS

Today’s Q3 trading update details a continuing strong performance for the nine months ended 30 September 2017, with trading since the last market update (interim results 12^th September) described as solid. Group revenue of £54.5m is up 34.4% YoY, with growth across all three operating divisions boosted by contribution from new subsidiaries. Of particular note is impressive Q3 organic growth of 12.4%, reflecting soft prior year comparatives following the June Brexit vote, as well as contribution from price increases and strong volume gains. This growth has been achieved at stable gross margins, reflecting the benefit of the Group’s multi-channel proposition. Trading for the full year remains in line with market expectations. On FY17 forecasts the Group trades on a PER of 12.1x, a discount of 40% versus its UK peer Group, offering a prospective dividend yield of 3.4%.

Divisional performance: Positive momentum has continued across all the Group’s operating divisions. Year to date, Flowtechnology revenue is +6% YoY, to £28.3m contributing 52% of group sales. Power Motion Control (PMC) sales are +82% YoY to £21.6m equating to 40% of Group revenue, up from 29% a year ago. Growth in PCM has benefited from acquisitions, including HTL (Jan 2017) and Hi-Power Limited (June 2017) whilst the recently announced acquisitions of Hydraflex Hydraulics (September 2017) and HES (October 2017) will continue to drive growth going forward. In Process, the Group’s newest division, sales rose 126%, albeit from a low base, to £4.5m (8.3% of Group). The acquisition of Orange County Limited announced in July will boost growth in this division in the year ahead.

Strategy enhancing acquisitions: Beyond the contribution to sales growth discussed above, acquisitions have enhanced the Group’s position with key European and global suppliers, as well as extending technical competence and geographical coverage. Management believe there is further potential for acquisitive expansion, with a pipeline of short and medium-term opportunities identified, whilst ensuring a manageable level of net debt on the balance sheet, currently at £12.1m.

Operational update: Completion of the Skelmersdale shared logistics centre has slipped slightly, now expected at the end of this month (previously September) but importantly there has been no disruption to service levels which we view positively. The new centre increases capacity 40%, generating operating efficiencies for the Group. Site identification for the shared engineering centre is ongoing.

Forecasts: Our forecasts are unchanged today, following an upgrade to numbers on the acquisition of HES Ltd, announced last week (12^th October).

Valuation: The Group continues to trade at a notable discount to its distributor peer Group; a PER of 12.1x is 40% below the UK sector average, despite its leading revenue growth profile (FY16 – FY19: +23.0%), solid EBITDA margin (FY17: 13.0%) and attractive dividend yield (FY17: 3.4%). We believe potential for multiple expansion is complemented by a well-executed acquisition strategy.