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Analyst Q&A: Flowtech Fluidpower “remains profitable for the first half” (LON:FLO)

Flowtech Fluidpower plc (LON:FLO) is the topic of conversation when Zeus Capital’s Equity Research Director Andy Hanson caught up with DirectorsTalk for an exclusive interview.

Q1: Flowtech Fluidpower has announced results for the first six months of the year, Andy what does these results show?

A1: Well, revenue declined in the first half and it declined almost 22% to £46.5 million, down from £60 million they reported last year. Obviously, the first half of this year has been impacted by COVID-19 pandemic and the lockdown, the business had actually been trading fine up until March and then obviously lockdown came in and changed the world significantly.

Importantly, the gross margin remained very resilient at 35% so very comparable to what it was doing last year which is a really good performance. Adjusted operating profit was almost £1 million which was down from the £6 million they did last year.

So, obviously, you can really see the impact of COVID-19 in those numbers.

Q2: I guess, just like most companies, they have experienced a difficult period then?

A2: Undoubtedly it has but so has every business and it’s actually come through really impressively. When I look at the numbers, if you look on a monthly performance, revenue in April was down 40%, in May 34% and in June 25% and whilst that 40% in April sounds like a big number but it’s materially better than lots of other businesses, particularly in the industrial distribution space.

I’d also say that the company remains profitable for the first half and generated operating cash and there was only one month, and that was April, that didn’t generate a profit, May and June were both profitable.

The other big positive coming out of this is net debt reduced again, they came and said in early April that net debt would reduce this year which was, I think, quite a positive statement considering we were right in the middle of lockdown and we didn’t really know what was going to happen. They’ve got a lot of self-help to improve the cash flow particularly on the working capital and that’s what we’ve seen.

So, even since March, net debt has come down by £1 million so whilst it’s been a difficult period and it’s been a difficult period for the economy, I think the company has actually come through this very well.

Q3: As you say, each month has improved since lockdown. With that in mind, what does the outlook like?

A3: The industrial space has been much slower to come back on stream than other parts of the economy, when you look at the consumer, the industrial space has been slower.

Trading for the company is getting better so for July and August, trading was down 15% and 12% respectively. So, on a good performance in September on that improving trend, it could mean Q3 is down single digit in terms of revenue and you enter Q4 and the weaker comparatives, because they had a tricky period last year, it could mean that Q4 revenue performance is flat Y-O-Y.

I think if that is the case, that’s probably much sooner than I anticipated.

Q4: How do you think Flowtech Fluidpower will fair if the economy is difficult in 2021? 

A4: That’s the big question, nobody really knows what the underlying issues with the economy are going to be, once we come through this initial lockdown period and if we have another lockdown etc.

I think what we have seen from the company is its ability to continue to trade profitable through very very difficult times and that shouldn’t change. If the economy isn’t too bad in 2021, they should see a material improvement in their profitability.

So, I think if you’re looking for a business with good recovery potential, that was too cheap going into the pandemic and should see good operational earnings recovery as the economy improves, then the company is a good opportunity.

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