Flowtech Fluidpower plc (LON:FLO) has announced the complementary acquisition of Balu Limited, for £8.2m (EV of £10.2m), alongside a proposed placing to raise £11m (gross). Balu comprises two subsidiaries: Beaumanor Engineering, a Leicester-based fluid power equipment distributor and a long-standing competitor to Flowtechnology, with annual sales of £8.1m; and Derek Lane & Co, a specialist fluid power engineering business that has crossover with Flowtech’s Power Motion Control (‘PMC’) Division (sales of £3.3m). The purchase expands the footprint by providing a second logistics centre in Leicester, alongside new customers and product lines from which to extract commercial synergies. There is scope to drive operational improvement, within Balu and across the wider Group, and this is a key area of focus for management in 2018. We forecast FY2018E/19E EPS to be broadly unchanged following the transaction, including the dilution from the placing. Nevertheless, the platform on which to deliver future expansion is significantly stronger, and now at a sufficient scale to explore consolidation opportunities in the €12.6bn European market, albeit most likely in FY2019.
Acquisition details – Flowtech has acquired Balu for an initial £8.2m, satisfied by £7.7m in cash (£1.7m is deferred for six months, dependent on performance) and £0.5m in shares. In addition, Flowtech will absorb c.£2m of net debt, bringing the total EV to £10.2m. Balu achieved sales of £11.5m and adjusted EBIT of £1.4m in the year to 31 January 2018, with Beaumanor contributing £1.3m to the profits.
Balu, an excellent fit – Beaumanor will strengthen Flowtech’s distribution presence in the East Midlands, which has previously been relatively low. Beaumanor sources its products from a large range of suppliers, including global brands such as Parker Hannafin. There is good opportunity to drive stock optimisation and purchase improvements, drive higher net margins (from 15.5%), as well as product cross-selling with Flowtech’s own exclusive-brand products. Derek Lane, whilst smaller, has a key contract with Babcock that supplies the MoD with specialist fluid power systems. Management believes there is good scope to leverage this relationship.
Impact to forecasts – Alongside the purchase of Balu, is the proposed placing to raise £11m. The acquisition sees our FY2018E/19E adjusted PBT increase by 7.7% and 14.3% respectively. However, the dilution from new shares sees EPS marginally reduced in FY2018E and increased in FY2019E, placing Flowtech on respective PERs of 11.0x and 10.0x. We see net debt reducing by £0.3m in FY2018E to £13.9m and then reducing by £2.1m in FY2019E to £10.8m.
Well-positioned for further expansion – As discussed, we anticipate M&A activity to reduce over the remainder of 2018 as management shifts the focus to extracting operational efficiencies from the enlarged Group. Nevertheless, there are significant opportunities for further consolidation over the medium term, particularly in mainland Europe. This should provide an excellent platform on which to leverage Flowtech’s existing strong brand relationships to drive long term earnings progression.
