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Zeus Capital

Flowtech Fluidpower Industrial Distribution

Yesterday’s UK GDP data highlighted the weakness experienced in the economy during calendar Q4. This has been reflected in the trading patterns at Flowtech Fluidpower with weaker than anticipated demand leading to a 10% reduction in organic revenue in Q4. For the year just ended, to Dec 2019, revenue is expected to be c. £112.4m (prev. £115.0m) leading to Profit Before Tax of £9.0m (prev. £10.8m). Importantly, the net debt estimate is better than anticipated at £16.6m (ZC estimate £17.0m) as the operational improvements in working capital reduce gearing. The revision to the FY19 outcome is rolled through into FY20 and FY21 and, as previously assumed, are based on the conservative assumption of a small amount of cost savings to come through but little revenue growth. Despite the revision to forecasts, the valuation of c. 10.0x FY20 earnings is not stretched and Flowtech yields an attractive 5.5%.  

  • Post a good start to the year trading conditions deteriorated culminating in a very difficult Q4: After a good H1, the second half of the year proved increasingly difficult. The interim results (24th Sept) stated that Q3 had been more difficult and that the reminder of the year was likely to see further weakness, albeit not to the extent that has been seen. Putting Flowtech Fluidpower’s performance in context, organic growth was a positive c.4.0% in Q1, declined to c. +2.9% at the interim stage and to +1.8% in first nine months of the year. The FY outcome of -1.5% highlights how difficult the last weeks of the year were, with Q4 organic revenue down 10%. 
  • Profit estimates in FY20 underpinned by improvement in costs: ZC FY20 forecasts assume a continuation of the difficult market backdrop, hence revenue forecasts are flat yoy at c. £112.0m but procurement savings coming through gross profit add c.£500k to PBT. FY20 profitability will be H2 weighted, comparators become easier as we move through the year due to the good performance in H119. Detailed changes in forecast can be seen on page 2.  
  • Positive performance in net debt despite the issues in Q4: Net debt of £16.6m at year end is better than ZC forecasts of £17.0m, a good result considering the deterioration in trading conditions. ZC estimates take a cautious approach to FY20 increasing net debt to £11.5m. This equates to just 1.0x forecast EBITDA post today’s change in estimates.
  • Valuation: A current year PER of 10.5x falling to 9.9x in FY20 remains attractive relative to peers. The dividend has grown 5% annually since float and ZC expect it to again in FY19 and FY20 offering a prospective yield of c. 5.5%.