FY16 revenue of £53.8m (FY15: £44.8m) led to adj PBT of £7.0m both in line with updated expectations. In addition to FY16 results the company has also released a trading update for Q117. Importantly, the year has started brightly with Group revenue growth of 32%. Whilst underpinned by three acquisitions completed during FY16, underlying performance across the business has been solid despite cost input pressures. The recent fund raising (10th March) raised a net c. £9.6m and will underpin further acquisitions. Forecasts assume net debt of c. £5.0m at the end of FY17compared with c. £13.0m at the end of FY16. Assuming c. 1.5x net debt would provide an additional c. £10.0m of financing for acquisitions. FY17 could prove a strong year for Flowtech should the improvement in the underlying market seen in Q1 continue and can be enhanced through accretive acquisitions. The valuation of 9.8x reflects dilution from the recent placing but no upside to earnings from planned acquisitions. As accretive deals are announced, we expect the growth and valuation discrepancy with peers to brought into focus. On 12x current year earnings the shares would trade at 155p, offering 23% upside before any acquisitive led earnings upgrades.
FY16 in line, with 20% revenue growth underpinned by acquisitions – Since listing (21st May 2014) Flowtech has executed on seven strategic acquisitions with three coming in FY16. This helped drive 20% revenue growth despite weakness in the underlying market. The British Fluid Power Association reported the weakest year since the financial crisis declining 4% yoy. This highlights the attractiveness of Flowtech’s acquisitive model which, in addition to solid top line growth, delivered c.9% Adj EBITA growth. Dividend growth of 5% was in line with the expectations set out at the time of the IPO. Operating margins remained a very healthy c. 14%.
Strong start to FY17 with strengthened balance sheet – The company has also released a Q1 trading update to the end of March, indicating that Group revenue is up c. 32% yoy. This is driven by acquisitions, particularly in the Process Division but also by solid underlying trading. The level of growth is supportive of the ZC updated FY17 revenue forecast of £65.5m, but acknowledge that it remains early in the year for a business with limited revenue visibility.
Valuation – Despite the short-term dilution from the share placing, Flowtech trades on a single digit PER and yields 4.6%. Once the additional resources are deployed there is scope for further multiple expansion. Against peers, Flowtech has the highest growth rate and yield, second highest margin and trades substantially below the group on a PER basis.
