Zeus Capital Equity Research Director Andy Hanson caught up with DirectorsTalk to discuss Flowtech Fluidpower PLC (LON:FLO)
Q1: Flowtech Fluidpower have posted their interim results this morning Andy, how do they look?
A1: It’s a good solid set of interim numbers I’d say, we had a detailed trading statement from them in early August so a lot of the headline revenue numbers were already known to the market and we’ve really got a bit more sort of meat on the bones with the actual results today. I think the first thing to say is group revenue in the first half was up 28% to £23.4 million, this was driven by acquisitions and the business has been very accretive since it came to market. They have done 6 acquisitions, 3 of those coming year to date, this was very much executing on the strategy that they had when they came to market. So good growth out of that, that filters through to a 33% improvement in gross profit to £9.6 million and then underlying operating profit was up almost 20% so a really good solid performance.
Q2: So what’s been happening in the underlying market?
A2: Interesting, I say a lot of Flowtech Fluidpower’s growth has been driven by acquisitions, the sort of core historic business is sort of flat to marginally down in the year on a like for like basis which I think is actually a really good performance when you look at some of the industry data out there. So the British Fluid Power Distributors Association has put out some numbers suggesting that the fluid power market is down to 6% in the first 7 months of the year so Flowtech’s broadly flat performance in H1 relative looks very good.
Q3: So how does this all translate into the valuation for Flowtech Fluidpower PLC?
A3: Well look, Flowtech is still relatively quite small, a sort of £60 million market cap, I think there’s a bit of a discount on the valuation for its size. The current valuation of 9 times earnings looks particularly low considering the sort of compound growth rate and profitability of about 20% over the last 3 years, about 19%/20% so that 9 times earnings does look anomalous relative to the growth that the business has been churning out and also relative to other listed distributors. I look at Diploma although the business is slightly different it is a niche specialist type distributor and it has very good margins so I do draw a comparable between Flowtech and Diploma and Flowtech trades sort of 20 times earnings so there is a disparity there. I also flag Flowtech’s current yield of 4.3% for the current year which is also very attractive so from a valuation perspective the shares still look very good value.
