For Flowtech Fluidpower Plc (LON:FLO) macro conditions remain favourable and this has supported organic revenue growth of 9.1% in H1/FY2018. With the benefit of strategic acquisitions, sales increased by 66% to £56.5m, and this underpins our FY2018 revenue and profit expectations. Gross margins are also noted as strong. The acquisition of Balu in March for £10.2m, alongside the major investment in the Group’s Skelmersdale facility in 2017 has positioned Flowtech to drive significant further scale over the medium term. The focus for the remainder of FY2018 is still on driving efficiencies via procurement benefits and information systems investments, while extracting synergy opportunities across the enlarged Group. The statement also points to a higher than anticipated working capital (detail below) that has seen the Group end H1 with £17.5m net debt. Our full year expectations are for this to reduce to £16.5m (previously £13.6m). Nevertheless, gearing is comfortable at only 1.3x, and the shares continue to offer attractive value on a prospective PER of 10.8x.
Favourable backdrop – The British Fluid Power Association reported growth of 6.7% in the first half of 2018 within fluid power distribution. This has principally been driven by product price increases across the sector, both in the UK and Europe. Flowtech’s wider offering has benefited from this and the Group achieved above-sector growth, evidenced by 9.1% organic progress.
Driving efficiencies and synergies – The acquisition programme has given Flowtech a strong share of the UK fluid power market. The focus is now to consolidate processes, drive improvements across the business and explore synergy opportunities during the remainder of 2018. Key projects include expanding inter-company procurement and stockholding benefits across Flowtech’s two logistics centres, consolidation of existing assets, and the implementation of the new Sage X3 reporting system for the whole Group.
Net debt expectations increased – The main drivers behind our increase in net debt (from £13.6m to £16.5m) have been within working capital, and notably an inventory build as a result of longer lead times from some key suppliers. In addition, there has been a slight increase in trade debtors, associated with the sales price growth that has been experienced across the wider sector.
European opportunities – As previously discussed, management is targeting expansion within the €12.6bn European market. The platform appears at sufficient scale now to explore consolidation opportunities within target geographies, replicating the current model, while leveraging key relationships.
Valuation undemanding – We make no changes to our sales and profitability forecasts, rather our assumptions model higher net debt. Nevertheless, Flowtech continues to trade at a material discount to peers.
