2017 has seen demonstrable strategic headway at Flowtech Fluidpower Plc (LON:FLO). Revenue increased by 45% to £77.9m, underpinned by growth across all divisions, with PBT to fall in the £8.6m to £8.8m range (Zeus £8.7m). Management has successfully integrated six acquisitions within the year, and delivered major operational improvements that have positioned the business well for FY2018. Importantly, organic growth of 8% reflects the benefit of commercial initiatives and sector recovery following a more difficult 2016. Net debt of £14.7m is slightly higher than our expectation of £14.0m, driven principally by accelerated capital investment. The short-term outlook is noted as encouraging, particularly for project-based work (Power Motion Control ‘PMC’ and Process divisions) where order books are significantly ahead of a year ago. As such, management has expressed a cautiously optimistic tone for FY2018, supported by an articulate acquisition-led growth strategy, while remaining cognisant of the on-going cost pressures across the wider sector.
A strong result in FY2017 – The positive momentum seen in Q3 largely continued into Q4, with the Group delivering organic revenue growth of c.8%. On a divisional basis for FY2017, the Flowtechnology (distribution) business saw revenue growth of 6% to £37.1m, of which the majority was driven by organic progress. PMC increased sales by 118% to £34.5m, to represent c.44% of Group revenue, with the benefit of four acquisitions in FY2017. The Process business increased sales by 117% to £6.3m, supported by the acquisition of Orange Country for £3.6m in July. Divisional gross margins were also noted to be broadly stable YoY, albeit with a heavier mix of lower margin PMC sales.
Continued operational investments – The upgrade of FLO’s shared logistics centre completed in Q4. This increases its capacity by c.40% and provides an improved layout that can deliver operational improvements, support organic growth and enable the integration of future acquisitions. Over 2018, investment in areas such as IT infrastructure to support an expanding Group is a key focus.
Revenue forecasts increased, profits unchanged – We have taken the opportunity to increase our revenue expectations by c.4% for each year over our forecast period. Our PBT forecasts remain conservatively unchanged, in recognition of continued investment and potential future cost pressures.
Zeus Valuation remains attractive – Despite a re-rating over the past 18 months, the shares trade on a 12-month prospective PER of only 11.4x. This represents a c.30% discount to growing small cap industrial businesses, averaging 16.1x on an unweighted (by market cap) basis, and a 40% to other value-add industrial distributors. We would also hope our low-to-mid single digit organic revenue growth assumptions prove conservative as the benefits of management’s acquisition strategy and other in-house commercial initiatives gather impetus.
