Flowtech Fluidpower PLC (LON:FLO) today provided a final statement of results for the year ended 31 December 2017.
“The benefits of our acquisition strategy are apparent in the financial performance of the Group, with six new companies acquired throughout the year. This acquisition activity has strengthened our position with important pan-European and global branded suppliers, enhanced our technical strength, and reinforced our position in our current core geographies of UK, Ireland, and Benelux.” – Malcolm Diamond MBE, Chairman
· GROUP REVENUE1
· GROUP OPERATING PROFIT1
· EARNINGS PER SHARE1
· 5% INCREASE IN DIVIDEND:
Ø Half year paid
Ø Proposed final dividend
Ø Total for the year
· CASH GENERATION FROM OPERATIONS
· NET DEBT
1. All results relate to continuing operations
UNDERLYING FINANCIAL HIGHLIGHTS
· UNDERLYING OPERATING PROFIT2
2. Underlying operating profit is continuing operations’ operating profit before acquisition costs, amortisation of intangible assets, share-based payment costs and restructuring costs
“We aim to have a market position as a full-service supplier of fluid power products and services. The ongoing expansion of ranges will see the Group capture a greater percentage of current customer spend and also open up new business opportunities in the wider market.” – Sean Fennon, CEO
· Revenue growth of 46% on previous year
· Underlying operating profit growth of 21.9% on previous year, and in line with market expectations
· Group operating profit growth of 7.7% on previous year
· Divisional gross margins maintained despite negative currency pressures
· Six acquisitions in 2017 in line with strategy, followed by Balu Limited in early 2018.
· Redevelopment of office space and creation of a centralised logistics centre in England’s North West.
· New Onsite Services division announced
· Pan European expansion commenced with acquisition of Hydroflex
· New Regional Managing Directors appointed for UK and Ireland, and Benelux.
Presentation of results: a presentation of results will be held today 10.30am-11.30am at the offices of our joint broker, finnCap, 60 New Broad Street, London EC2M 1JJ. A dial in facility is also available on request; please call Fiona Tooley on +44 (0) 7785 703523 or email email@example.com.
INTRODUCTION BY THE CHAIRMAN, MALCOLM DIAMOND MBE
When we floated our company in May 2014, it was with a commitment from the Board to instigate a medium to long term consolidation of the highly fragmented hydraulic and pneumatic industry, firstly, in the UK, and then to extend this strategy into Europe over the next foreseeable few years.
Our 2017 result reaffirms the Board’s confidence in our strategy as we continue to expand and develop our capabilities both within the UK and internationally.
Despite a challenging outlook for the UK economy, in 2017 the fluid power market experienced a significant turnaround following two years of soft trading; presenting a period of opportunity, strengthened by European demand.
The Group achieved 46% growth in total revenue to £78.3m, 8% of which came from organic growth, 38% from acquisitions. Profit before tax for 2017 totalled £6m versus £5.5m in 2016. Earnings per share reached 9.69p in 2017 versus 9.96p in 2016.
This year there was a major refurbishment and redesign at the Skelmersdale site expanding capacity and streamlining the logistics operation will provide considerable scope for the profitable integration of future acquisitions. Moreover, it created modern office and meeting facilities for Flowtechnology UK, Indequip and Group employees. Pleasingly, this transition was completed with no disruption to customer service for the businesses which utilise this facility.
The benefits of our acquisition strategy are apparent in the financial performance of the Group, with six new companies acquired throughout the year, supported by the successful capital raising in March 2017. This acquisition activity has strengthened our position with important pan-European and global branded suppliers, enhanced our technical strength, and reinforced our position in our current core geographies of UK, Ireland, and Benelux. In addition to expanding our Process division, we have significantly expanded our Power Motion Control operations, offering additional design, build and component supply into new market sectors including; mobile, rail, and aerospace. I am confident these acquisitions will provide a solid foundation for future profitable growth.
From the outset, the Flowtech Fluidpower strategy has remained the same; to build a fluid power Group to serve all customer needs within the fluid power market. The addition of a fourth, ‘Onsite Services’ division will in time enable the Group to provide total fluid power solutions in technical component supply, niche product supply and installation, bespoke designed solutions and finally planned onsite maintenance and repair.
By focusing on selected customers, utilising the Group status and investing in machinery many of our businesses have been successful in winning new and ongoing sizeable supply contracts with billion-pound companies. Two such investments include the automatic hose-cutting machine at Nelson Hydraulics and the Parker pipework machinery at Group HES.
To summarise, it is clear that the Group is now entering an exciting stage of development as its ambitions for growth increasingly improve its market share within the UK and the Republic of Ireland, whilst being vigilant for opportunities to spread further into Europe, having managed the Benelux business into a healthy level of consistent performance.
Brexit consequences remain a relative unknown at this time, whilst forex movements and UK import prices have been well managed to date by our highly experienced and focused commercial management teams.
I continue to be impressed by the commitment and energy of not only our senior management, but also of our growing workforce and our business team leaders, and their ability to adapt to new and dynamic market opportunities that are arising constantly within our industry.
Finally, it was very pleasing to be given such valuable and widespread support for both the Board and the Executive Management team during the recent successful process to raise £11 million (before costs) in new capital for the Group in March and April of this current 2018 period. This has enabled us to complete the acquisition of our largest UK catalogue-based competitor Beaumanor, along with its sister business Derek Lane & Co.
The management will now focus its attention throughout the remainder of 2018 in leveraging the operational benefits that will accrue from not only this acquisition, but also the additions that were brought to the Group throughout this 2017 reporting period.
Subject to Shareholder approval at the Annual General Meeting which is to be held on 6 June 2018, the Directors are proposing a final dividend of 3.85p per share. This, together with the interim dividend of 1.93p (paid on 24 October 2017), brings the total for the year to 5.78p which again matches the commitment made at the date of the IPO of 5% growth. The outlook for further enhancement to dividend flow remains good and the Board would like to reiterate its view that the retention of a strong dividend policy is a foundation for the investment case in the Group.
Zeus Capital notes: Continued momentum into FY2018
FY2017 has been a period of excellent headway and Flowtech has entered FY2018 with confidence. As previously noted, management has successfully integrated six acquisitions over 2017, while operational improvements and a more favourable backdrop has driven a 24% increase in adjusted PBT to £8.7m (in line with ZC forecast). Revenue growth of 46% to £78.3m is split 8% organic and 38% through acquisition, with year-end net debt at £14.9m (FY2016 £13.1m). The platform for further progress is strong, underpinned by the acquisition of Balu in March 2018 for an EV of £10.2m, alongside the equity fundraise of £10.5m. The shorter-term focus is now on extracting efficiencies across the enlarged Group, particularly with regards to extracting procurement benefits. Nevertheless, there are significant opportunities for further consolidation beyond this, particularly in mainland Europe, where there is scope to leverage Flowtech’s existing brand relationships that in turn can drive long term earnings progression.
Growth across all businesses – Flowtech recorded growth in all divisions during FY2017. Flowtechnology (distribution) increased sales by 6% to £37.2m, principally through organic progress, while the Power Motion Control (‘PMC’) and Process divisions saw growth of 120% each, with the benefits of acquired sales. Gross margins of 33.9% were slightly down on FY2016 (35.5%), reflecting adverse currency movements, in common with the wider sector, and the mix effect from slightly lower margin acquisitions.
Q1 update –Flowtech’s Q1/FY2018 statement points to an increase in sales of 52.4% over the period, of which 6.3% was an organic contribution. Net debt at March end of £18.4m is in line with management’s expectations, following the initial payment of Balu, and contingent payments for Hi-Power and Orange County (2017), and the first 50% tranche of the equity placing. The second £5.2m from the placing was paid on 4th April, materially reducing net debt.
European growth targeted – Management has expressed a desire to expand within the €12.6bn European market. The platform is at sufficient scale now to explore consolidation opportunities within target geographies and to replicate the current model. Moreover, Flowtech’s strong relationships with key global suppliers such as Parker Hannifin and Eaton Corp provides excellent scope to drive growth in new European regions as a footprint is established.
Valuation undemanding – The shares are trading slightly above March’s fundraise price, placing Flowtech on a prospective PER of 10.8x. In comparison, small cap UK growing industrial peers currently trade on an average multiple of 17.9x, despite a wider sector de-rating in 2018 so far. We continue to see scope for a narrowing of this material discount and look to a consistent strategic delivery by management over FY2018, with respect to operational initiatives.