It has been a busy first eight months of the year for Flowtech Fluidpower Plc (LON:FLO) with four major acquisitions completed and a successful £10.0m fund raise. In addition, today’s interim results indicate that all three divisions have seen organic and acquisitive growth despite the industrial market in the UK remaining difficult. Revenue increased 24.8% to £34.2m (HY16: £27.4m) with underlying operating profit increasing 11% to £4.5m (HY16: £4.1m). The solid trading provides increasing confidence in the achievability of the £8.6m FY17 PBT estimate. Forecasts are unchanged on today’s statement but with the potential for further acquisitions before the year end, profit estimates could increase. Flowtech’s valuation remains compelling with the shares trading on 10.1x FY17 earnings, falling to 9.0x in FY18 as profit benefits from an annualised impact of the four acquisitions undertaken year to date. This is a material (50%) discount to UK listed peers. It also offers better growth, sustainably higher margins and, at 4.2%, a more attractive dividend than the majority of peers.
Strong performance across all divisions: today’s results confirm positive momentum across all divisions, with a pleasing performance in the Group’s core Flowtechnology business, which has seen strong organic growth YoY (+5.3%), despite a challenging market backdrop. Particularly pleasing from a margin perspective as the core business generates in excess of 20% operating margins, pre-central costs. The performance in the core distribution business looks materially ahead of the industry. Power Motion Control division grew 53.7% YoY with the majority (40%) via acquisition. The Process division whilst small, c. £2.0m of revenue, is growing rapidly with one acquisition in H117 and double digit organic growth. Importantly all three divisions have continued to experience good trading since the period end providing increased confidence in FY forecasts. Albeit, the business has low visibility due to the short length of its order book.
Continuing to execute on acquisition strategy: Last week’s acquisition of The Hydraulic Group BV(HG) is Flowtech’s first foray into expanding the PMC division into continental Europe. With operations in Holland and Belgium, HG offers a relatively low risk first step as it can leverage Flowtech’s existing Benelux distribution operations. HG is the fourth major acquisition completed year to date with three incorporated into the PMC division and the other helping to expand the newest division, Process. Management has stated that it looks to acquire businesses for between 5x-7x EBITDA. To date, all acquisitions have been broadly in line with these metrics, highlighting management’s commitment to not overpaying.
Valuation: Trading on a PER of 10.1x current year earnings, the shares are valued at a sizable 50% discount to UK distributor peers. The discount increases in FY18 as Flowtech’s multiple falls to 9.0x as it benefits from acquisitions. Diploma, the closest listed peer in terms of acquisition driven model and quality high margin earnings, trades on over 20x year two earnings. In addition, Flowtech offers a yield of 4.2%, again, well in advance of peers.
