Coming just a month after the release of the interim results (24th September) today’s Q3 trading statement does not contain any surprises. Organic revenue growth has slowed since June but remains positive at 1.8%. Contribution from the Balu acquisition means Group revenue year to date is up 4.3%. The services division continues to bear the brunt of the more difficult trading conditions with revenue down YTD whilst the Components division is up 5.8%. Net debt is marginally up on the £18.8m reported at the HY stage, at £19.1m, due to dividend payments, earn-out consideration as well as other payments made during the quarter. ZC reduced net debt expectations for FY19 at the time of the interims and expect this to be achieved due to improved cash generation and an improved working capital position during Q4. The current valuation reflects the more difficult trading backdrop leaving the shares trading on 7.7x FY19 year earnings, reducing to 7.1x in FY20. The yield is 5.9% with the dividend having increased 5% annually since the business floated in 2014.
- After a good H1, the more difficult trading outlook alluded to in the interim outlook statement is being borne out: Flowtech started the year brightly with organic growth of c.4.0% in Q1. This declined to 2.9% at the interim stage and today’s statement indicates a further decline to 1.8% in first nine months of the year. When combined with the contribution from the acquisition in Q1 last year Group revenue is up 4.3%. Current forecasts assume FY19 revenue growth of 3.6% to £115.0m, assuming a further deterioration in Q4. With other industrial companies and macro indicators having highlighted that trading conditions had worsened the decline in growth should not have come as a surprise.
- Profit progression in FY20 driven by self-help initiatives rather than top line growth: ZC FY20 forecasts assume a continuation of the difficult market backdrop, hence revenue forecasts are flat yoy at c. £115.0m but procurement savings of c. £400k, coming through gross profit, and a further £600k savings in operating and central costs mean operating profit will increase c.9.0% to £12.4m.
- Net debt will reduce from here: Net debt assumptions reduce as an improvement in inventory days is factored in. In FY19 this results in £17.0m, against the previous estimate of c. £19.0m, falling to £9.0m in FY20. Management has significant scope to reduce the working capital commitment of the business, particularly in stock. This combined with anticipated profit will drive the material reduction in net debt over the forecast period.
- Valuation: A current year PER of 7.7x falling to 7.1x in FY20 is cheap against peers. The dividend has grown 5% annually since float and will again in FY19 offering a yield of 5.9%.
