Flowtech Fluidpower PLC Q&A with Zeus Capital (LON:FLO)

Flowtech Fluidpower Plc

Flowtech Fluidpower PLC (LON:FLO) is the topic of conversation when Zeus Capital’s Equity Analyst William Game caught up with DirectorsTalk for an exclusive interview


Q1: We saw an interesting update from Flowtech Fluidpower today announcing that they have an agreement in place to acquire Balu and its subsidiaries. Will, what can you tell us about the size of the company and its financials?

A1: So, they’ve purchased Balu today for £10.2 million EV and that comprises £8.2 million equity and £2 million of acquired debt. Balu achieved sales of £11.5 million to the year 31st January 2018, profitability of £1.4 million, the 2 divisions that make this up are Beaumanor Engineering and Derek Lane contributed £1.3 million to profits 7 £0.1 million to profits in the last 12 months respectively.


Q2: So, how does Balu fit in with Flowtech’s group?

A2: Well, we think it’s a good fit.

First of all, Beaumanor Engineering is a longstanding competitor to the Flowtechnology distribution division with annual sales of £8.1 million, we believe this is a good fit because it’s based in the Midlands where Flowtech has previously has relatively little presence. It will strengthen that presence but also allow cross-selling of products and services with the existing Flowtechnology business as well as an additional logistics facility that it can leverage and improve margins over time from currently about 15.5% probably to the average of the business which is north of 20%.

Derek Lane is more of a fit for Flowtech PMC division and we believe the synergies here lie with one of its large customers, Babcock, which supplies the MoD. It’s not a customer that Flowtech has had strong connections with in the past and again, there’s a good belief that this relationship can be leveraged across the PMC business.


Q3: How does today’s update change your forecasts?

A3: Obviously the group raised £11 million gross as well through new shares at a price of 170, from a PBT perspective, our 2018 forecast increased by 7.7% and our 2019 increased by 14.3%. However, if you include the dilution from the new shares, it effectively leaves EPS unchanged, there’s a slight increase in 2019 which is obviously good. From a debt position, our 2019 forecast new debt improved by £2.1 million to £10.8 million and that reduces the net debt to EBITDA of about 0.8 times next year so comfortably good for Flowtech.

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Q4: What can you tell us about the group’s priorities now for the remainder of 2018?

A4: I think, as we’ve alluded to, the M&A activity will probably calm down somewhat after a strong run of acquisitions over the past year and a half. I think 2018 will be focussed on extracting operational efficiencies from the larger group, looking to position the business for future expansion and in particular, management is looking to invest in an X3 Sage financial system which can deal with multi-currency global businesses to support, hopefully, a geographical expansion. So, I think it’ll be very much looking to extract efficiencies from the current and large business.


Q5: So, what are the longer-term aspirations of the group?

A5: I think today’s update is important in that Flowtech Fluidpower now has over 10% share of the UK and Ireland market for fluid power products in the hydraulics and pneumatics sectors and I think the planned operational improvements and investments in the business should hopefully ready Flowtech for expansion into Europe in 2019 and beyond. They’ve got big supply relationships with the likes of Eaton and Parker Hannifin and today’s acquisition further strengthens that and I think those can be leveraged by achieving a footprint in mainland Europe.

So, I think the longer-term aspirations of the group will be definitely geographical expansion and we look to update about that in 2019, hopefully.

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