Flowtech’s first half revenue increased c.28% to £27.4m (HY15: £21.4m). However, acknowledgement that trading has been weaker in recent weeks has led to a reassessment of forecasts resulting in a downgrade to profitability of c.6% in FY16 and 2% in FY17. Estimates in FY18 increase on the back of the acquisition of TSL announced this morning. Industry data indicates volume across the hydraulic and pneumatic sectors was down 6% in the five months to May and recent developments appear to be extending weakness into H2. This has impacted Flowtech’s forecast performance for FY16 which is now expected to be marginally below market expectations. The recent c.+20% weakness in the shares reflects wider sector concerns and was potentially factoring in a larger decrease to forecasts than today’s 6%. The single digit downgrade also needs to be put into the context of the 14.7% yoy growth in FY16 PBT. Even before today’s statement the shares were trading on a significantly lower value at less than 8x new FY16 forecasts against peers on 14.7x.The prospective yield of 5.0% is over twice covered and is expected to grow 5% yoy.
* Solid performance in H1 – In keeping with Flowtech’s growth strategy, the acquisitions of Hydravalve and Indequip in early FY16 underpinned strong 28% revenue growth in H116. Underlying the performance has also been sound with Group organic revenue growth broadly flat in H1 against the -6% industry decline reported by The British Fluid Power Distributors Association (BFPDA) in the first five months of the year. However, Flowtech has experienced increasing market weakness in the last few weeks and our view is this will lead to a decrease in FY16 revenue forecast of 1.3% to £53.9m. The decline in revenue combined with a c. 60bps impact on net margin from the change in mix leads to a 5.7% downgrade as profit before tax falls from £8.1m to £7.6m. The effect is less pronounced in FY17 with just a 2% cut to profit while the forecast for FY18 increases on today’s acquisition.
* Flowtech still growing strongly – Flowtech has aggressively executed its stated strategy of combining organic with acquisitive growth. Today’s acquisition of Triple Six Limited (TSL) is the sixth since listing and the third in FY16. As a result of the acquisitions, the business will show growth in FY16 of 20.3% in revenue and 14.7% in profitability, in a year when many other distribution businesses will struggle. Three year CAGR in revenue and PBT to FY16 will still be an impressive 18.9%, respectively, on new forecasts.
* Valuation not reflective of growth – The c.+20% fall in the share price since the end of May has discounted a larger earnings downgrade than today’s 6%. On current year forecasts the shares are trading on a PER of 7.8x and yield 5.0%. This is below the initial valuation when the business came to market, despite it having made significant advances in terms of scale and breadth of offering, and a 61% discount to its closest peer Diploma.
