Flowtech Fluidpower Solid FY18 results and a good start to FY19

Flowtech Fluidpower (LON:FLO) Revenue increased 42% to £111.1m (FY17: £78.3m) with organic growth a pleasing 5.7%. Adj. operating profit of £11.4m (FY17: £9.1m) improved £2.3m in absolute terms, a 25% increase yoy. Margin decreased 130bps to 10.3% due to the lower margin businesses joining the Group through acquisition. Forecasts assume a conservative 50bp margin recovery in FY19. Trading in the new year has been encouraging with Group revenue increasing 14% and organic growth of 4.0%. The shares trade on a significant discount to peers, trading on 7.7x FY19 earnings and yield 5.2%.

FY18 results: Headline numbers had been disclosed in the comprehensive trading update released at the end of January (31st). Therefore, the results are in line with ZC forecasts that were updated at that time with a small increase to revenue and net debt assumptions but profitability unchanged. Revenue of £111.1m (FY17: £78.3m) was up 42% yoy driven by acquisitions. Importantly, Group organic growth was 5.7%, with all three divisions positive, suggesting the business took market share during the year. Adj. Operating profit of £11.4m (FY17: £9.1m) increased 25%, despite 130bps reduction in margin, to £10.3m. PBT of £10.7m was in the middle of the £10.6m to £10.7m range provided in the January trading update and in line with the ZC forecast of £10.7m. Net debt of £19.9m was slightly higher than anticipated due to a higher working capital commitment, a theme noted by many industrial companies this reporting period.

Trading in the first quarter has been good with solid organic growth: The high margin Flowtechnology business grew 23%, helped by the acquisition of Beaumanor in March 2018, and the Power Motion Control businesses were up 10%, and follows on from the strong trading reported in the last few months of 2018. The Process division is inherently lumpy due to the relative size of individual orders and the 16% decline in revenue in Q119 is expected to reverse in Q2. Organic growth of 4% in Q1 is slower than the 5.7% reported for FY18 and the 9.1% at HY18. However, this should not come as a surprise considering recent economic growth figures and needs to be put in the context of revenue forecasts assuming c. 2%-3% organic growth for FY19. A recovery in margin post acquisitions will be the key to achieving forecasts, not a beat on revenue.

Valuation: Flowtech remains fundamentally undervalued relative to peers, trading on 7.7x current year earnings and yielding 5.2%, on a dividend that has grown 5% annually since the business listed. A sustained period of meeting expectations whilst highlighting the operating synergies of acquired businesses would see the shares re-rate.

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