Today’s Q3 Flowtech Fluidpower Plc (LON:FLO) trading update details a continuing strong performance for the nine months ended 30 September 2017, with trading since the last market update (interim results 12th September) described as solid. Group revenue of £54.5m is up 34.4% YoY, with growth across all three operating divisions boosted by contribution from new subsidiaries. Of particular note is impressive Q3 organic growth of 12.4%, reflecting soft prior year comparatives following the June Brexit vote, as well as contribution from price increases and strong volume gains. This growth has been achieved at stable gross margins, reflecting the benefit of the Group’s multi-channel proposition. Trading for the full year remains in line with market expectations. On FY17 forecasts the Group trades on a PER of 12.1x, a discount of 40% versus its UK peer Group, offering a prospective dividend yield of 3.4%.
Divisional performance: Positive momentum has continued across all the Group’s operating divisions. Year to date, Flowtechnology revenue is +6% YoY, to £28.3m contributing 52% of group sales. Power Motion Control (PMC) sales are +82% YoY to £21.6m equating to 40% of Group revenue, up from 29% a year ago. Growth in PCM has benefited from acquisitions, including HTL (Jan 2017) and Hi-Power Limited (June 2017) whilst the recently announced acquisitions of Hydraflex Hydraulics (September 2017) and HES (October 2017) will continue to drive growth going forward. In Process, the Group’s newest division, sales rose 126%, albeit from a low base, to £4.5m (8.3% of Group). The acquisition of Orange County Limited announced in July will boost growth in this division in the year ahead.
Strategy enhancing acquisitions: Beyond the contribution to sales growth discussed above, acquisitions have enhanced the Group’s position with key European and global suppliers, as well as extending technical competence and geographical coverage. Management believe there is further potential for acquisitive expansion, with a pipeline of short and medium-term opportunities identified, whilst ensuring a manageable level of net debt on the balance sheet, currently at £12.1m.
Operational update: Completion of the Skelmersdale shared logistics centre has slipped slightly, now expected at the end of this month (previously September) but importantly there has been no disruption to service levels which we view positively. The new centre increases capacity 40%, generating operating efficiencies for the Group. Site identification for the shared engineering centre is ongoing.
Forecasts: Our forecasts are unchanged today, following an upgrade to numbers on the acquisition of HES Ltd, announced last week (12th October).
Valuation: The Group continues to trade at a notable discount to its distributor peer Group; a PER of 12.1x is 40% below the UK sector average, despite its leading revenue growth profile (FY16 – FY19: +23.0%), solid EBITDA margin (FY17: 13.0%) and attractive dividend yield (FY17: 3.4%). We believe potential for multiple expansion is complemented by a well-executed acquisition strategy.
