Flowtech Fluidpower Share Discussion Threads

[tratante] 21/9/2018 08:40

Thanks for posting Grosvenor. Don't have ST's forensic knowledge of the company, but my thoughts entirely: a 30% fall is a total overreaction.

[rcturner2] 21/9/2018 08:33

I have bought back in today.

[grosvenor] 21/9/2018 08:30

Vectorvest Value these at 212.35p as of last night

get your own analysis here :- hxxp://www.vectorvest.co.uk/
or here

[grosvenor] 21/9/2018 08:26

Inv Chronicle Wednesday:-
Aim-traded shares in Skelmersdale-based Flowtech Fluidpower (FLO:120p), the UK's leading specialist supplier of technical fluid power products to around 5,000 distributors and resellers, have been marked down by 30 per cent following a modest profit warning yesterday and are back to the 118p level at which I first advised buying ('A fluid performance', 2 Jun 2014).

True, total dividends of 21.5p a share paid in the past four years cushion the blow to some extent, but that’s not the point as I was positive on the investment case in early summer when the shares were priced at 159p (‘FlowtechR17;s fluid performance underrated’, 1 Jun 2018). They subsequently hit a high of 195p by the end of that month and shareholders also banked a final payout of 3.85p, so the reversal has been dramatic. It’s also a reversal that is completely overdone for a raft of reasons in my view.

Firstly, announcing board room changes at the same time as a profit warning is not ideal, and undoubtedly accentuated the share price slide. Chief executive Sean Fennon, who has held that position since 2009, is retiring for close family reasons from the business at the end of 2018. I can fully understand why he is stepping down and respect why he doesn’t want his personal life broadcast across the media.

Bryce Brooks looks an able replacement as chief executive having joined Flowtech as finance director in 2010 and overseen an acquisition strategy that has doubled the company’s operating profits in the past five years. Mr Brooks will be replaced as finance director by Russell Cash who is a former Baker Tilly partner and holds the same position at Manchester-based FRP Advisory LLP. Mr Cash is an interesting appointment as Mr Brooks outlined during our lengthy results call. Flowtech will be pursuing a cash focused strategy to improve return on capital alongside tighter working capital management across its multiple operational businesses.

Secondly, the profit warning was not major. Joint house broker Zeus Capital only reined in its 2018 adjusted pre-tax profit estimate by £700,000 to £10.7m on maintained revenue estimates of £107.6m, and clipped its 2019 profit estimate by £1m to £12.1m on forecast revenue of £115m. The other joint broker finnCap has similar estimates which support EPS estimate of 14.9p this year and 16.2p in 2019.

The main reason for the downgrade is that analysts at Zeus are factoring in higher operating costs from acquisitions made over the past nine months which has added £2.2m to their previous operating cost estimates this year, and about £2.6m in 2019 to reflect costs incurred to streamline the cost base. Gross margin of 35.5 per cent in the six months to end June 2018 was actually 1.5 percentage points higher than Zeus’ previous estimate. That’s worth noting as the additional gross margin earned is offsetting the higher operating costs. Importantly, revenue estimates have not been trimmed back.

Also, analysts have little in the way of cost savings actually embedded in their 2019 assumptions apart from £0.5m of savings already being targeted from an acquisition made in March 2018 (see below). That could prove conservative as acquisitions made have higher cost bases than Flowtech, so there should be savings to be gained in areas such as procurement, back office functions and operational efficiencies.

Thirdly, a delay in delivering a £1.5m contract on a Thames Tideway hasn't help sentiment although this is hardly a major bear point. A more cautious tone in the trading outlook may have unsettled investors, and in particular signs of softening of growth prospects within Flowtech’s Power Motions Controls (PMC) business which designs, assembles and supplies engineering components and hydraulic systems so has more project-based work.

However, this needs to be put into perspective as PMC only accounted for a third of Flowtech’s first half operating profit, and the much larger and higher margin Flowtechnology distribution business (which has a profit margin three times higher at 19.3 per cent) continues to benefit from positive tailwinds and upside from acquisitions too. Indeed, Beaumanor Engineering, a Leicester-based fluid power equipment distributor has traded strongly since being acquired by Flowtech in March 2018, vindicating the decision to raise £11m at 170p a share in placing to fund the bolt-on deal.

In any case, it’s only trading in part of the PMC business that is proving less benign and the contributions from 90 per cent plus of Flowtech’s businesses (by revenues) are highly predictable. One would expect this solidity given that Flowtech’s distribution unit offers over 100,000 individual product lines to more than 80,000 industrial maintenance, repair and overhaul end-users in the UK and Benelux, so has a dominant market position.

Fourthly, investors have completely misinterpreted the company’s working capital position and its debtor management. Due to the timing of the acquisition in March, receivables increased sharply from £20.9m at the end of 2017 to £27.2m, and inventories were up by £4.6m to £29m. However, average debtor days actually improved in the six-month period. There is absolutely no issue with late payment of accounts. Mr Brooks confirmed that bad debts account for a miniscule 0.2 per cent of turnover and there has been no change in debtors overdue. Furthermore, receivables have been cut to £26.3m since the end of June.

Fifthly, the company’s finances are in actually in good health. Flowtech has a £16m revolving credit facility and £4m senior debt facility, both of which are priced at 2 per cent above LIBOR, and a £5m accordion facility with its lenders. At the end of June 2018, net debt was £18m, so well within these facilities. What has not been disclosed in the interim results, and which I can reveal, is that although net borrowings have been cut from £18m to £17.5m since the end of June 2018, Flowtech has also made £895,000 cash payments to settle the deferred consideration on past acquisitions.

Moreover, the year-end net debt figure of £17.6m forecast by both Zeus and finnCap is stated after taking into account a further £2.15m of earn-outs between now and the end of the year. This is well worth noting because it illustrates the highly cash generative nature of the business. It also means that the deferred and contingent liabilities of £5.7m in Flowtech’s balance sheet at the end of June 2018 will be reduced to only £2.65m by the end of the fourth quarter of 2018, so can be easily covered by the operational cash flow from the business. There is absolutely no issue with settling deferred consideration.

Sixthly, the board has created the role of group credit manager and made an appointment with the successful applicant due to join Flowtech in the fourth quarter, so expect cash collection rates to improve further and reduce the amount of capital tied up in working capital. This can only improve stock turn and return on invested capital in the business.

In terms of cash flow generation, Zeus’ free cash flow estimate of £9.3m for 2019 is actually £400,000 higher than its previous estimate. It is based on £12.5m of operating cash flow less taxation (£2.4m) and interest payments £0.4m). Free cash flow should cover the forecast dividend (6.4p in 2019) almost three times over while offering scope for Flowtech’s board to reduce current net debt of £17.6m by around a fifth by the end of 2019. The fact that earn-outs will be much less next year adds further substance to the scope to reduce debt markedly.



The bottom line

The combination of boardroom changes, rising inventories and receivables mainly due to the timing of an acquisition, higher debt levels, and a small profit warning have clearly spooked investors, but the reaction has been overly harsh for the reasons I outline above.

Ignoring the possibility of earnings growth coming through in 2019, the shares trade on a PE Ratio of 8 for 2018 based on adjusted EPS rising from 14p to 14.9p, and offer a 5 per cent prospective dividend yield based on raised payout of 6.1p a share for the 2018 financial year (the interim payout was hiked by 5 per cent to 2.03p a share, hardly a sign of distress). In my book that’s value. The current valuation is also discounting a dramatic drop off in trading in the next year which is highly unlikely, Brexit or non-Brexit.

When the dust settles and investors take into account each of the six factors I have addressed, then I can see scope for Flowtech’s share price to recover most of this week’s share price decline. It may take time, but the high yielding shares have recovery potential at this depressed level. Buy.

[tratante] 20/9/2018 14:54

Director buying, not big bucks, but not insignificant either.

[shaker44] 19/9/2018 15:32

mw8156: buy

[tratante] 19/9/2018 15:22

I don't know, but I would guess that a 30% fall was a complete over reaction.

[mw8156] 19/9/2018 15:14

and, dare I ask what was simon's conclusion?

[shaker44] 19/9/2018 12:39

very good write up by simon t in investors chronicle just now. he got new info from the fd that explains rather better than the rns issues on costs, margin 2019 etc

[rcturner2] 19/9/2018 08:36

I have held in the past and certainly am interested in buying again at some point, but I think waiting for the final results might be the safest option here.

[dsct] 19/9/2018 08:17

Although the Admin costs have increased dramatically, is this not due to the acquisition running costs ?

The Operating Margin % for last year and this H1 are :
H1/17 9.9%
H2/17 7.3%
Year/17 8.4%
H1/18 7.9%

What did surprise me initially was the cashflow, but not a concern once I'd reconciled it.
"Net cash from operating activities" being (2,341) v 2,784 in H1/17.

This approx. £5m difference is mainly made up of :
Profit from operations = £1m
Change in trade and other receivables = (£2.2m)
Change in stocks = (£1.4m)
Change in trade and other payables = (£2.9m)

So, from my view, the changes are (could be?) also to do with the acquisitions.

[thorpematt] 18/9/2018 21:20

Sales, they look fine. Good infact.
Margins are up and that is obviously a good thing.
Debt is perfectly manageable.

The problem is the administrative expenses. Where once these were just shy of 50% of GP and circa 17% of sales, they are now approx. 62% and 22% repectively.

Strangely I would have expected to see heavy exceptionals which would equate to a significant lowering of the net margin as a consequence. As it is we have no exceptionals of significance.

What appears to be the case here is that the acauired businesses have not as yet been integrated in a true sense. Clearly if the increased revenues were to have been converted to the traditional level of net margin (or ondeed an improved one via saving synergies) then the results would be very strong. But it appears that as yet the focus is more on ensuring strong sales as opposed to efficiencies.

[dsct] 18/9/2018 15:34

Can I join in too ? lol

I've had FLO on watchlist for nearly a year, with two triggers (150p and 125p), both of which were hit this morning.

Had a glance at the RNS and couldn't see anything too troublesome, so put a buy-order in which got actioned at just under 120p.

This is an initial purchase, and I'll wait until the 23rd Oct. Q3 Trading Update to decide what to do - Sell, hold or buy more.

One concern is that there are problems with integrating these acquisitions - e.g. I.T., but I'm hoping they have enough experience and expertise to do this, and believe they've not any immediate plans to go on a buying spree.

[davidspringbank] 18/9/2018 14:49

The drop seemed excessive so I bought 4125 @ 121.00. The volume appears a bit one-sided with buyers outstripping sellers by a country mile. The sp, as a result of the drop, has returned to the values of Mar 17 last year.

[edmundshaw] 18/9/2018 11:54

Added some at just under 120p this morning. No guarantees, but the sell-off this morning was IMO too sharp.

[tim1478] 18/9/2018 11:13

I had a buy limit for a tree shake and find I am a holder with an immediate 14% loss. With the reduced forecast there is still a reasonable peg of 1 and the valuation is good. Debt is a concern. I have set a stop loss at 110. A lot depends on sentiment around Brexit (which I personally hope will be reversed by a second referendum)

[fizzypop] 18/9/2018 10:47

Cannot get an electronic quote on £3K or 2500 shares.

[edmundshaw] 18/9/2018 10:45

Cheers Dave.

[davebowler] 18/9/2018 09:45

Zeus;
A year of transition
H1/FY2018 represents another period of significant development at Flowtech. Organic growth of c.9% and the benefit of the Balu acquisition in March for £10.2m, alongside four during H2/FY2017, has seen revenue increase by 65.1% to £56.4m, and operating profit from £4.5m to £5.7m (margin 10.1%). These acquisitions have also driven an improvement in the gross margin by 2% to 36.1%. The Board remains highly confident in the direction of travel and its commercial positioning to capture much further scale within the €12.4bn European fluid power sector. However, the shorter-term focus is firmly on investment that can deliver sustained operational improvements, procurement benefits and wider Group synergies. Our reduced forecasts incorporate increased operational costs associated with this investment and additional overhead from recent acquisitions. We also take a more cautious tone within Flowtech’s OEM-based businesses, including uncertainty on timing over a £1.5m order. Nevertheless, Flowtech continues to trade at a discount to peers on a PER of 11.5x in FY2018E, falling to 10.6x in FY2019E.

§ Divisional performance – The Flowtechnology (distribution) Division was strengthened with the acquisition of Beaumanor in March, and delivered revenue growth of 21.4% to £23.5m. The statement notes that Beaumanor has traded strongly since acquisition, and this is supported by a stable backdrop across the wider distribution business. PMC has grown revenue by 127.9% to £28.9m and operating profit by 74.7% to £1.9m, with steady progress noted in H1. Management has pointed to a recent softening in some end markets and uncertainty over the timing of a £1.5m order in H2. Elsewhere, the Process Division is noted to have traded well, albeit management remains cautious.

§ Revised forecasts – Our forecasts see a more cautious outlook in Flowtech’s PMC and Process businesses. In addition, we have included additional overhead associated with recent acquisitions, where management is seeking to drive efficiencies. Our FY2018E PBT is lowered by 7% to £10.7m and net debt from £16.5m to £17.6m. FY2019E PBT reduces by 8% to £12.1m and net debt from £13.2m to £13.9m. A more detailed breakdown is shown on page 4.

§ Board changes – A separate update today notes that Sean Fennon will retire from his position as CEO immediately and retire from Flowtech in December. Bryce Brooks will move to CEO from CFO. The Board has already appointed a new CFO, Russell Cash, who starts in November. Details on page 3.

§ Valuation – Despite our reduced forecasts, Flowtech trades at a significant discount to its wider peer group, on a prospective PER of 10.7x. This compares against UK and international peers averaging 16.7x and 14.8x respectively.

[edmundshaw] 18/9/2018 08:32

Personally I think the reaction is a bit harsh. Obviously there is (was, now) a growth rating on the shares, but the CFO is still in place, they already have a new CFO and one contract is only marginally material to the profits full year.

So we are left with discomfort on Brexit and the vague feeling that something else bad will transpire or growth will stall. Causing a 30% share price collapse!? And now, the yield is 5%!

[edmundshaw] 18/9/2018 08:23

Uncertainty of Brexit and a contract (£1.5m) going pear-shaped. Plus the CEO is stepping down. The three together are more frightening thatn the sum of the parts...

[peter27] 18/9/2018 08:12

There's two separate profit warnings buried at the bottom of the text.

[mshafiq] 18/9/2018 08:09

Looks like the market doesn't like the results.