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Flowgroup hacks at costs

An ECJ ruling has delayed the launch of Flowgroup's boiler, leaving it to cut costs to keep the product viable
September 29, 2015

Given Flowgroup 's (FLOW) share price dropped 60 per cent in the half year to June, management is pretty upbeat. Faced with an EU ruling which threatened the commercial viability of its flagship product, the energy-efficient boiler maker has embarked on a major cost reduction programme and secured important backing from its supply chain partners.

IC TIP: Hold at 11.25p

In June, the European Court of Justice (ECJ) ruled the UK's reduced VAT rate of 5 per cent for energy-efficient products was unlawful. That decision added £500 to the theoretical unit price of Flowgroup's domestic boilers. Flowgroup's pitch that the boiler would "pay for itself" through reduced energy bills was thrown into doubt. In response, the group has already found savings equivalent to £200 per boiler, and expects to cut costs by a further £100 each month until the product's launch in early 2016.

Although the group only intends to make 15,000 boilers next year, it will need a strong balance sheet. Fortunately, manufacturing partner Jabil (US: JBL) - which owns an 8 per cent stake in the group - has been very supportive with working capital requirements, according to management. Net cash is expected to be £16m by December, and domestic boiler sales should leave that figure unchanged by the end of 2016.

Analysts at Cenkos Securities are forecasting a full year pre-tax loss of £16.6m, giving a loss per share of 5p (2014 losses: £9.4m and 3.7p).

FLOWGROUP (FLOW)

ORD PRICE:11.25pMARKET VALUE:£35.7m
TOUCH:11-11.5p12-MONTH HIGH:49pLOW: 10p
DIVIDEND YIELD:nilPE RATIO:na
NET ASSET VALUE:11.6p*NET CASH:£21.5m

Half-year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201416.0-4.7-1.86nil
201520.5-7.0-2.71nil
% change+28---

*Includes intangible assets of £18.2m, or 5.7p a share