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Flowtech Fluidpower Plc

Flowtech Fluidpower Plc Acquires Hi-Power Limited further strengthening the Group

Flowtech Fluidpower plc (LON:FLO), the AIM listed specialist technical fluid power products supplier has today announced the further strengthening of its Power Motion Control (“PMC”) division through the acquisition of Hi-Power Limited and the business and certain assets of Hi-Power Hydraulics Limited (“Hi-Power Hydraulics”) (together “Hi-Power” or “the Acquisition”), a distributor of hydraulic equipment components and, systems design & build predominantly to the mobile and transport sectors.

Hi-Power Limited was founded 40 years ago and holds a market leading position in the Republic of Ireland. Today, Hi-Power holds a number of long-term customer relationships across its Republic of Ireland and Northern Ireland operations. The business employs in total 38 people across its sites in Cork, Dublin, Belfast and Manchester.

The Acquisition provides another complementary business to the Group’s PMC division, delivering incremental revenue through a wider customer channel and extends Flowtech’s position with important European suppliers further boosting the divisional offer.

In Ireland, Hi-Power Limited will operate as an independent sister company within the PMC division and will continue to be managed by the current Hi-Power executive management team who have been in place for a number of years. The UK operation, Hi-Power Hydraulics, will become a trading division of Primary Fluid Power and will report to its Managing Director, Paul McGrady.

Sean Fennon, Chief Executive, Flowtech Fluidpower plc commented: “This Acquisition represents a further strengthening of the Group offering to the hydraulics marketplace, delivering a greater depth of technical expertise along with a strengthening of our core product set.

“We continue to work on a number of other opportunities which we fully expect, over the coming months, to reach positive conclusions on. As we have previously stated, our targeted approach ensures we can achieve both a concentration and enhancement to our product set which is, and will continue to be, core to our business model.”

For the year ended 31 December 2016, Hi-Power achieved sales of £6.9 million producing EBIT of £0.4 million. Net assets excluding net cash and property at the same date were £1.9 million. As well as some immediate back office savings, the Group expects to deliver synergy opportunities over the medium term through coordinated operational activities, particularly in Dublin and Manchester, as well as wider commercial opportunities through collaboration with the division’s other Irish operation, Nelson Hydraulics.

The Acquisition completed on 22 June 2017 is being funded from the Company’s own resources and comprises £1.9 million on completion with additional payments expected to be c£0.5 million subject to an earn-out over the 18 month period to 31 December 2018. The maximum consideration payable is £3.5million.

In summary, the Board of Flowtech remain very encouraged about the future; the Group will provide a business trading update to the market in mid-July ahead of scheduled Half-year results, which will be released in September.

(Note: The majority of the consideration to be paid in Euros. The above values have been converted at an exchange rate of 1.14 €/GBP)

Zeus Capital noted:

Flowtech has announced that it has acquired Hi-Power Limited, a distributor of hydraulic equipment components and systems design and build, serving the mobile and transport sectors across Eire and Northern Ireland. The acquisition strengthens the group’s Power Motion Control (PMC) division, deepens technical expertise and expands its core product offering, as well as establishing relationships with key European suppliers. This deal is the first acquisition since the Group’s £9.6m fund raise in March and comprises of an initial £1.9m consideration, representing 1.0x NAV, with a further £0.5m subject to an earn out over the 18 months to December 2018. We upgrade our forecasts for the Hi-Power acquisition with FY17 EPS +2.8%, reflecting six months trading contribution, and a 5.4% upgrade to FY18 EPS. On a PER of 10.4x the shares trade at a sizable 45% discount to sector peers. We expect the company to deploy its remaining financial firepower on further earnings-accretive deals, bringing into focus this valuation discrepancy. At current levels the shares also offer an attractive 4.3% dividend yield.

  • Market leading Irish business. Founded 40 years ago, Hi-Power holds a market leading position in the Republic of Ireland, employing 38 people across sites in Cork, Dublin, Belfast and Manchester, serving a number of long term customer relationships across Eire and Northern Ireland. The acquisition delivers incremental revenue, expands Flowtech’s customer reach and establishes relationships with key European suppliers which can be leveraged across the Group’s wider PMC offering. The Hi-Power Irish business will operate as an independent subsidiary within the PMC division under its current management team, whilst the UK operations will merge to become a trading division of Primary Fluid Power under MD Paul McGrady.
  • Synergy opportunities. Management expect to realise some immediate back office savings and have also identified synergy opportunities to be realised over the medium term, including commercial opportunities from collaboration with the divisions other Irish business, Nelson Hydraulics.
  • Forecasts: We have upgraded our forecasts to reflect contribution from Hi-Power going forward, as we had not previously assumed any upside from acquisitions, only dilution from the recent share issue. FY17 earnings rise 2.8% with a 5.4% uplift in FY18. A summary of forecast revisions is presented below.

Valuation: Flowtech’s valuation remains compelling against distributor peers, with the highest forecast 3 year sales CAGR at 13.0%, highest dividend yield at 4.3% and an EBITDA margin of 13.2%; the second highest of its peer Group. Despite this, it trades at a substantial discount with a PER of 10.4x some 45% below its peer group average. We believe there is potential for notable multiple expansion as the Group deploys its available resources and continues to successfully execute its acquisition strategy. A return to 1.5x Net debt/EBITDA implies an additional c.6.5m of available debt finance (ignoring any uplift in EBITDA from future acquired businesses), giving the Group firepower in a fragmented market, with management hopeful of reaching positive conclusions on a number of further opportunities in the coming months.