This morning’s confident trading update from Flowtech Fluidpower Plc (LON:FLO), delivered ahead of the Group’s AGM today, confirms the positive momentum, reported in the Q1 announcement (4th April) where sales rose 32% YoY, has continued in recent months, with both organic and newly acquired operations performing well. Alongside this impressive top line growth, flexible pricing and product mix has enabled the Group to maintain margins despite ongoing input cost pressures. This sustained positive performance and potential for further acquisitive growth underpins our investment case. The successful share placing in March raised net proceeds of c.£9.6m and our forecasts assume net debt of c.£5.0m at the end of FY17, equating to just 0.6x EBITDA. A return to 1.5x Net debt/EBITDA implies an additional c.£10m of available debt finance (ignoring any uplift in EBITDA from acquired businesses), giving the Group notable firepower in a fragmented market. A PER of 11.3x reflects dilution from the recent placing but no upside to earnings from planned acquisitions and represents a 40% discount to Flowtech’s sector peers. As accretive deals are announced, we would expect the growth and valuation discrepancy with peers to be brought into focus. At current levels the shares also offer an above average 4.0% dividend yield.
* On track to meet FY17 expectations –The Group is confident in delivering FY17 results in line with current market forecasts. We make no changes to our numbers following top line upgrades last month. Forecast sales of £65.5m represent growth of 22% YoY underpinned by acquisitions. Our current forecasts also reflect the short-term dilution from March’s share placing but no benefit from further acquisitions; we anticipate future earnings upgrades as these funds are deployed.
* Imminent acquisitions – this morning’s statement confirms management are actively pursuing a pipeline of opportunities, with the potential to complete numerous deals over the coming months. Since listing (May 2014), the Group has successfully executed seven strategic acquisitions, broadening its product and service offerings and driving impressive revenue growth, with sales +20% in FY16 against an otherwise subdued market backdrop. The fragmented nature of the industry along with the Group’s solid balance sheet supports this strategy going forward.
* Valuation – Against its peer group, Flowtech has the highest forecast 3 year sales CAGR at 9.3%, and highest dividend yield at 4.0%, as well as the second highest EBITDA margin of 13.4% but trades on substantially lower multiples. A FY17 PER of 11.3x represents a 40% discount to the sector whilst an FY17 EV/EBITDA of 9.0x is 27% lower than the average. We see scope for further multiple expansion as the Group deploys its available resources and continues to successfully execute its acquisition strategy.
