FY2017 has been a period of excellent headway and Flowtech Fluidpower Plc (LON:FLO) has entered FY2018 with confidence. As previously noted, management has successfully integrated six acquisitions over 2017, while operational improvements and a more favourable backdrop has driven a 24% increase in adjusted PBT to £8.7m (in line with ZC forecast). Revenue growth of 46% to £78.3m is split 8% organic and 38% through acquisition, with year-end net debt at £14.9m (FY2016 £13.1m). The platform for further progress is strong, underpinned by the acquisition of Balu in March 2018 for an EV of £10.2m, alongside the equity fundraise of £10.5m. The shorter-term focus is now on extracting efficiencies across the enlarged Group, particularly with regards to extracting procurement benefits. Nevertheless, there are significant opportunities for further consolidation beyond this, particularly in mainland Europe, where there is scope to leverage Flowtech’s existing brand relationships that in turn can drive long term earnings progression.
Growth across all businesses – Flowtech recorded growth in all divisions during FY2017. Flowtechnology (distribution) increased sales by 6% to £37.2m, principally through organic progress, while the Power Motion Control (‘PMC’) and Process divisions saw growth of 120% each, with the benefits of acquired sales. Gross margins of 33.9% were slightly down on FY2016 (35.5%), reflecting adverse currency movements, in common with the wider sector, and the mix effect from slightly lower margin acquisitions.
Q1 update –Flowtech’s Q1/FY2018 statement points to an increase in sales of 52.4% over the period, of which 6.3% was an organic contribution. Net debt at March end of £18.4m is in line with management’s expectations, following the initial payment of Balu, and contingent payments for Hi-Power and Orange County (2017), and the first 50% tranche of the equity placing. The second £5.2m from the placing was paid on 4th April, materially reducing net debt.
European growth targeted – Management has expressed a desire to expand within the €12.6bn European market. The platform is at sufficient scale now to explore consolidation opportunities within target geographies and to replicate the current model. Moreover, Flowtech’s strong relationships with key global suppliers such as Parker Hannifin and Eaton Corp provides excellent scope to drive growth in new European regions as a footprint is established.
Valuation undemanding – The shares are trading slightly above March’s fundraise price, placing Flowtech on a prospective PER of 10.8x. In comparison, small cap UK growing industrial peers currently trade on an average multiple of 17.9x, despite a wider sector de-rating in 2018 so far. We continue to see scope for a narrowing of this material discount and look to a consistent strategic delivery by management over FY2018, with respect to operational initiatives.
