Flowtech Fluidpower plc (LON:FLO) interim results to 30th June are in line with the comprehensive trading update (8th August) showing a good recovery in underlying demand from pandemic hit H1 ‘20. Revenue in the first half was down 7.2% on the same period in 2019 at £55.3m (H119: £59.6m) and up 18.7% on HY20. Gross margin has remained strong at 35.4% (HY19: 35.7%) despite the headwinds of cost inflation and supply chain issues. Whilst both factors remain a concern for at least the remainder of FY21, and most likely into Q1 FY22, the operating profit of £3.4m provides good visibility on achieving FY21 estimate of £5.5m. ZC estimates are unchanged on today’s results assuming a flat revenue performance yoy in H2. This equates to an 8% reduction on the revenue achieved in H2 2019. In terms of profitability, the recovery this year could come through more strongly should OEM markets recover more quickly in H2. The margin estimate in FY21 remains below half of what should be sustainable at 5.3%. The capital structure is materially improved and the rating of 21x current year earnings almost halves in FY22 as forecasts assume normalised trading post the pandemic.
- Good recovery in H1 underpins ZC confidence in meeting FY21 forecasts: Today’s interims indicate that that trading has been stronger than expected in the first half and, as indicated in the trading update, was ahead of the Board’s expectations. Despite this, guidance is for FY21 to be in line with market expectations. As a result, ZC estimates remain unchanged. Cost inflation and global supply chain issues suggest a conservative stance is prudent at this point. Forecasts assume H2 ’21 revenue is flat on H2 ’20. The conservative stance runs into FY22 estimates despite an expected 80% increase in profitability. A continuation of the recovery being seen in UK industrial markets aligned to an easing of pressure in the supply chain could lead to positive earnings surprises.
- Divisional performance as expected with Services showing good turnaround: The Maintenance Repair and Operations (MRO) focused Flowtech business is marginally down, -2.9%, on FY19 whilst the Fluidpower Solutions and Services business, both more exposed to the OEM market, are down 10.7% and 11.5% respectively. This is as expected considering developments in the market. The recovery in the Services division is particularly pleasing as it returned to profitability and is on course to make a material contribution in FY21 post a £1.2m loss in FY20. Supply chain issues and price inflation continue to put pressure on margins across the sector but Flowtech is better positioned than most B2B businesses to pass these on.
- Valuation: Flowtech Fluidpower FY21 earnings multiple of c. 21x is not expensive when factoring in the level of recovery coming through. On more normalised FY22 earnings it trades on c. 12x with a 1.6% yield. This remains very attractive against peers.
