Flowtech Fluidpower plc (LON:FLO) interim results provide detail to the comprehensive update released in late July (28th). The business traded profitably in each month of H1 apart from April, despite lockdown, reporting adj. operating profit of £0.9m (HY19: £6.1m). Importantly, cash generation remained resilient and net debt declined to £14.5m (HY19: £18.8m), a £2.1m reduction over the six-month period. The resilience of Flowtech’s model is highlighted by revenue declining to c. 60% of normalised levels during April, the month with the most stringent lockdown measures in place and when many industries were completely shut down. This is a strong performance relative to other industrial companies and distributors. As expected, formal guidance is still suspended but will be reintroduced when the operating environment stabilises.
Flowtech is coming through FY20 in better shape than most businesses and its earnings recovery will benefit from operational gearing as cost savings come through. This is not reflected in the share price, using the depressed FY19 earnings, the shares are trading on 6.7x historic earnings.
- Resilient and profitable performance in H1: Revenue declined 21.8% to £46.6m (HY19: £59.6m). Gross margin was resilient at 35.1% (HY19: 35.6%) leading to an adj. operating profit of £0.9m (HY19: £6.1m) and adjusted PBT of £0.6m (HY19: £5.6m). Net debt of £14.5m is c. £1.0m lower than stated in March, despite lockdown. The reduction in the working capital commitment is a structural change within the business and it will not materially increase as revenue normalises. With net debt continuing to fall during H2 and new banking facilities in place, the balance sheet is in a strong position.
- Improving revenue trends will see an improvement in profitability in H2: April bore the brunt of the lockdown impact with revenue declining 41%. Since restrictions started to ease, Flowtech has seen four months of steadily improving revenue trends with August 12% down yoy. This should continue as it annualises easier comps in Q4 and should result in H2 profitability being higher than H1, albeit down yoy. Short term visibility has improved during the summer but the medium to longer term outlook remains unclear. The economic fallout post government support schemes coming to an end during the autumn make forecasting difficult, exacerbated for businesses such as Flowtech that have short term order books (c. six weeks). However, Flowtech Fluidpower’s focus on MRO markets will see it weather a prolonged downturn better than most, as evidenced by its performance to date this year.
- Valuation compelling on recovery potential: On depressed FY19 earnings the shares are trading on 6.7x and 6.1x EV/EBITDA (with the caveat net debt in FY20 will be lower than FY19A).
