Flowtech Fluidpower (LON:FLO) Today’s trading update reassuringly states that trading is in line with market expectations following a solid performance in Q3. Group revenue growth for the nine-month period to the end of September was 54%. This was driven by the acquisition of Balu (20th March 2018) and three additional acquisitions in Q3 and Q4 2017. Importantly, organic growth continues to show good momentum at 6.7%, albeit, this is down on the 9% reported for the six months of the year as the strong growth in H1 has moderated. Net debt at £17.6m is in line with that reported at the HY and in line with the FY18 forecast. We leave forecasts that were revised at the time of the interim results (18th Sept) unchanged on today’s trading update. The short-term focus of the business is to drive synergies from the acquired businesses through operational and procurement improvements. The recent derating offers investors an interesting entry point with the shares trading on a single digit PER of just 7.7x and yielding 5.3%. This is a material discount to its listed peers (page 2). The shares should re-rate as management de-gear the balance sheet and the growth from the acquisitions becomes increasingly apparent.
Divisional performance – The Flowtechnology (distribution) Division was materially strengthened with the acquisition of Beaumanor in March and delivered revenue growth of 23.0% to £34.8m (Q317: £28.3m). Underlying operating margins at 19% were down yoy at the interim stage in the Flowtechnology division. This is a direct consequence of the lower margin contribution from the acquisition. We would expect that this can improve in line with the over 20% margin achieved in the distribution business historically once synergies are extracted. The Power Motion Control division continues to benefit from the acquisitions undertaken in FY17 with revenue increasing 98% to £42.9m (Q317: £21.7m). There is also positive progress in relation to the delayed £1.5m order from a sub-contractor on the Thames Tideway project. The process division remains small relative to the other divisions with revenue of £6.0m (Q317: £4.5m) an increase of 33% yoy.
Valuation – The recent c.30% share price decline from c.170p to last night’s close of 114p would appear an overreaction relative to the size of the forecast revisions of c.7%-8% put through at the time of the interims. Flowtech Fluidpower trades at a significant discount to its wider peer group, on a prospective PER of 7.7x. This compares against UK and international peers averaging 15.3x and 13.0x respectively (as shown on page 2), notwithstanding the recent wider market de-rating. Putting the shares on a UK peer multiple would generate a share price of c.228p. In addition, the shares are forecast to yield 5.6% in FY2019E.
