Flowtech Fluidpower plc 2016 Trading Update, Acquisition & Strategy Update

Flowtech Fluidpower Plc

Flowtech Fluidpower plc (LON:FLO), a specialist technical fluid power products supplier has today provided the following update on its performance for the year ended 31 December 2016, together with details of acquisition and strategy update:-

 

2016 PERFORMANCE:
Revenue 2016 2015
Year ended 31 December (Unaudited) (Audited) % Change
£0 £0
Flowtechnology 35 33.2 5.40%
Power Motion Control 15.9 11.6 37.10%
Process 2.8
Group revenue 53.7 44.8 19.90%

The 2016 performance can be summarised as follows:

· Against difficult trading conditions the Group has delivered a solid performance
· Group revenue was c.19.9% up on 2015 at approximately c.£53.7 million (c.19.3% in constant currency)
· British Fluid Power Distributors Association Market Survey indicates 2016 fluid power overall distributor sales growth was negative 3.9% (hydraulics -5.9%, pneumatics +0.2%)†
· Post Brexit currency movements with resultant impact on input prices have to date been successfully passed on to customers due to our flexible pricing model, with 2016 exit margins maintained. However, some margin contraction was experienced in H2 while prices were managed upwards on products sourced in Euro and USD and sold in GBP markets
· Three acquisitions successfully integrated into the Group, each delivering benefits, and a third “Process” division established focused on process industries, including Pharma, Environmental, and Steam
· Net debt at year end was c.£13.0 million
· Significant investment in central and sales resources aimed at optimising cross channel opportunities, and future acquisition integration programme underpinning long term growth
· As a result of these investments and the gross margin contraction in H2, the Board expects underlying* PBT will be in the range £7.0m to £7.2m.
DIVIDEND

The Directors remain confident in the Group’s overall performance and future. As such the Board intends to propose to shareholders a final dividend which will deliver a 5% increase over 2015 and in line with current market expectations. In addition, the Board is committed to ensuring a continued focus on cash generation as part of our model and believe that when appropriate to do so, the Group will have the capacity to improve on its current distribution policy and trend.

ACQUISITION OF HYDRAULICS & TRANSMISSIONS LIMITED (“HTL”)

The Group is pleased to announce the further strengthening of its Power Motion Control (“PMC”) division through the acquisition of HTL which completed on 20 January 2017. The consideration comprises £0.75 million on completion and additional payments expected to be c.£1.0 million subject to an earn-out over the two-year period to 31 December 2018. In addition, the Group will assume a further £0.9 million being the net debt position held at completion giving a total of £2.65 million. The consideration is being funded from the Company’s own resources.

HTL (www.htluk.co.uk) was established in 1973, and has been managed by the current ownership team since an MBO in 2007. It currently employs 25 staff and distributes hydraulic equipment and components from its location in Ludlow, Shropshire. HTL provides fluid power solutions predominantly to the mobile market segment and supplies some of the market leaders such as JCB, McConnell and Alamo. The acquisition provides incremental revenue to the Group that we could not previously address, strengthens our position with key global suppliers including Eaton, Walvoil and Casappa, and complements our previous acquisitions of Primary Fluid Power and Nelson Hydraulics.

HTL will operate as an independent sister company within PMC. Managing Director, Ian Teece and Commercial Director, Richard Salisbury, who have led the business for over 10 years will also join the Group’s Operational Board.

For the year ended 31 December 2015, HTL’s turnover was £5.2 million producing EBIT of £0.3 million. Net assets at the same date were £0.5 million. As well as some immediate back office savings, the Group expects to deliver synergy opportunities over the medium term through coordinated procurement and operational activities.

STRATEGY UPDATE

The Group has a clear view of its growth objectives – to create a specialist fluid power organisation that remains focused on its core competencies through its delivery of ‘class-leading’ service and support. Our long-term growth model is based on both organic growth, coupled with complementary acquisitions in the UK and Europe in a very fragmented marketplace.

The successful integration of new businesses into the Group is critical, maintaining momentum and ensuring an ability to continue to trade with their customers seamlessly. To support this an experienced integration team has been created tasked with delivering a smooth and speedy transitions process. During 2016, Indequip, Hydravalve & TSL, were acquired and successfully integrated into the Group – these acquisitions fit within the defined strategy previously outlined of developing a Focused Fluid Power Group.

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As a result of the negative trends experienced by many businesses in our marketplace during the second half of 2016, the Group was more cautious in its pursuit of opportunities, particularly in Q4. However, the acquisition pipeline remains strong and continues to develop; we have several acquisition and product opportunities being actively pursued and, we are pleased to announce our most recent acquisition detailed above.

LOOKING AHEAD

Flowtech Fluidpower plc now operates three divisions: Flowtechnology, Power Motion Control & Process. This structure has delivered greater opportunity to focus on fluid power solutions while at the same time, developing a deeper technical expertise within our complementary businesses; specialising our offering in the fluid power sector and, delivering high service levels to all our customers across our business. This formulation gives us a solid platform for growth as well as opening and creating new opportunities in new and exciting sectors.

SUMMARY

Our business has shown resilience in a difficult market, with our most recent acquisitions beginning to deliver growth. The Board remains confident in the strategy, commercial opportunities and the prospects of the Group as a whole, and expects to deliver further solid growth over the coming years building on the resilient performance seen in 2016.

NOTICE OF RESULTS

The Directors look forward to updating shareholders further on the Group’s performance and the outlook for 2017 at the time of the 2016 full year results, scheduled to be released on Tuesday, 4 April 2017.

 

Zeus Capital commented:

FY16 revenue will be £53.7m (FY15: £44.8m), in line with ZC estimate of £53.9m, showing growth of c. 20% yoy underpinned by the three acquisitions undertaken in the year. However, due to higher costs relating to the acquisitions and, to a lesser extent, gross margin pressure, PBT will be in the region of £7.0 to £7.2m equating to growth of between 5.5% and 8.0%. As a result, FY16 ZC profit forecast is reduced by 8.0% to £7.0m. The impact in FY18 and FY19 is muted by the announcement of a further acquisition leading to an increase in revenue estimates of 8.7% whilst profit estimates fall c.4.5% in each year, respectively. Despite the decrease in forecasts the PER multiple on FY17 earnings remains single digit at just 9.1x, against a distributor average of 15.8x. With commitment to the forecast dividend increase reiterated, Flowtech offers an above average yield of 4.1%

Acquisitions drive revenue growth – Flowtech Fluidpower plc’s strategy since listing has been to consolidate what is a fragmented market to create a specialist fluid power organisation. Including HTL announced today, revenue has increased from c. £35.0m to a forecast £63.0m in FY17 on the back of seven acquisitions. FY16 revenue grew c.20% and is in line with forecasts that were marginally revised in August. The core Flowtechnology business grew revenue by c. 5.5%, albeit with the benefit of currency translation. This is ahead of the market that fell 3.9% in the eleven months to the end of November 2016, according to the Fluid Power Distributors Association (BFPDA).

Forecasts impacted by cost pressure – FY16 forecast gross margin falls 30bps as we factor in the impact from increased currency pressures and the lagged affect of implementing price increases. Additional pressure has been felt at the operating line with margin falling c.140bps yoy and 110bps more than forecast due to central overhead. In the face of difficult end markets, extra cost relating to overhead in the acquired businesses was taken on in an effort not to effect the service offering. That revenue was broadly in line suggests this has worked at the expense of margin. Management remain focused on extracting costs as businesses are integrated more fully at the right time. Underlying forecasts, excluding today’s acquisition, conservatively assume no improvement in gross margin and costs have been rebased at the higher FY16 level.

Valuation – Despite the fall in forecasts Flowtech trades on just 9.1x FY17 earnings despite continuing to offer growth in profitability. This is a 43% discount to the distributor peer group whilst offering a yield of 4.1%, above the sector average of 3.0%.

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