Flowtech Fluidpower plc Acquisition and fundraise – Zeus Capital

Flowtech Fluidpower Plc

Flowtech Fluidpower plc (LON:FLO) has announced the complementary acquisition of Balu Limited, for £8.2m (EV of £10.2m), alongside a proposed placing to raise £11m (gross). Balu comprises two subsidiaries: Beaumanor Engineering, a Leicester-based fluid power equipment distributor and a long-standing competitor to Flowtechnology, with annual sales of £8.1m; and Derek Lane & Co, a specialist fluid power engineering business that has crossover with Flowtech’s Power Motion Control (‘PMC’) Division (sales of £3.3m). The purchase expands the footprint by providing a second logistics centre in Leicester, alongside new customers and product lines from which to extract commercial synergies. There is scope to drive operational improvement, within Balu and across the wider Group, and this is a key area of focus for management in 2018. We forecast FY2018E/19E EPS to be broadly unchanged following the transaction, including the dilution from the placing. Nevertheless, the platform on which to deliver future expansion is significantly stronger, and now at a sufficient scale to explore consolidation opportunities in the €12.6bn European market, albeit most likely in FY2019.

Acquisition details – Flowtech has acquired Balu for an initial £8.2m, satisfied by £7.7m in cash (£1.7m is deferred for six months, dependent on performance) and £0.5m in shares. In addition, Flowtech will absorb c.£2m of net debt, bringing the total EV to £10.2m. Balu achieved sales of £11.5m and adjusted EBIT of £1.4m in the year to 31 January 2018, with Beaumanor contributing £1.3m to the profits.

Balu, an excellent fit – Beaumanor will strengthen Flowtech’s distribution presence in the East Midlands, which has previously been relatively low. Beaumanor sources its products from a large range of suppliers, including global brands such as Parker Hannafin. There is good opportunity to drive stock optimisation and purchase improvements, drive higher net margins (from 15.5%), as well as product cross-selling with Flowtech’s own exclusive-brand products. Derek Lane, whilst smaller, has a key contract with Babcock that supplies the MoD with specialist fluid power systems. Management believes there is good scope to leverage this relationship.

Impact to forecasts – Alongside the purchase of Balu, is the proposed placing to raise £11m. The acquisition sees our FY2018E/19E adjusted PBT increase by 7.7% and 14.3% respectively. However, the dilution from new shares sees EPS marginally reduced in FY2018E and increased in FY2019E, placing Flowtech on respective PERs of 11.0x and 10.0x. We see net debt reducing by £0.3m in FY2018E to £13.9m and then reducing by £2.1m in FY2019E to £10.8m.

Well-positioned for further expansion – As discussed, we anticipate M&A activity to reduce over the remainder of 2018 as management shifts the focus to extracting operational efficiencies from the enlarged Group. Nevertheless, there are significant opportunities for further consolidation over the medium term, particularly in mainland Europe. This should provide an excellent platform on which to leverage Flowtech’s existing strong brand relationships to drive long term earnings progression.

Beaumanor was founded in 1974 and is an importer and distributor of fluid power equipment in the UK. The Beaumanor business is based in Leicester and employs 44 staff. Derek Lane was founded in 1979 and is a supplier of fluid power products and engineered solutions. The Derek Lane business is based in Newton Abbot, Devon, and employs 28 staff. The unaudited financial statements of Balu for the year to 31 January 2018 showed revenue of £11.4 million and proforma EBIT of £1.4 million. Unaudited net assets excluding net debt at the same date were £5.9 million.

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The Acquisition provides a further complementary business to the Group, creating a co-ordinated approach to three major catalogue brands in the UK market place. The Acquisition widens the target customer base using separate trading “styles” from the same platform and will replicate the Flowtechnology model to deliver cost and service synergies. It also creates a second logistics centre in Leicester to deliver stock optimisation and supply chain improvements across the Group, as well as establishing a substantial operational site in the important Midlands region of the UK and operationally de-risks the main Skelmersdale site.

As part of the transaction, Flowtech is also pleased to announce that Zeus Capital and finnCap have co-ordinated a Firm Placing and Conditional Placing to raise up to £11.0 million by way of the issue of an aggregate 6,470,589 new Ordinary Shares at the Placing Price of 170 pence per Ordinary Share with certain existing and new institutional and other professional investors. Those net funds raised in addition to the cash consideration for the Acquisition will be used to strengthen the balance sheet.

The Placing Price represents a discount of approximately 3.8 per cent. to the closing mid-market price of the Ordinary Shares on 13 March 2018 (being the last practicable dealing day prior to the date of this announcement). The Placing Shares will represent approximately 10.9 per cent. of the ordinary share capital as enlarged by the Acquisition and Placing and will, when issued, rank pari passu in all other respects with the Company’s Existing Ordinary Shares. Following the Firm Placing, the Conditional Placing and the allotment of the Acquisition Shares, the total number of ordinary shares and voting rights in the Company will be 59,582,531. The Company does not hold any shares in treasury.

Application has been made for the Firm Placing Shares to be admitted to AIM and it is expected that Admission will become effective and trading will commence at 8:00 a.m. on 15 March 2018.

Sean Fennon, CEO, Flowtech Fluidpower plc commented: “We are delighted to announce the acquisition of Balu which brings together three major catalogue brands in the UK market place and again widens the customer base we serve. It also gives us the opportunity to add a second logistics centre in Leicester which should deliver stock optimisation and supply chain improvements across the Group and operationally de-risk the main Skelmersdale site.

We are also pleased to announce the successful placing to raise £11 million which demonstrates clear support from both new and existing shareholders for our ongoing strategy to develop a focused fluid power group that serves a wide number of industry sectors.”

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