Shares in Skelmersdale-based Flowtech Fluidpower (FLO:159p), the UK's leading specialist supplier of technical fluid power products to around 3,400 distributors and resellers, offer a very attractive entry point, having pulled back from the 180p level to a major a support level (150p to 156p). For good measure they are massively oversold, too, with the 14-day RSI reading only 20, suggesting a tradable rally is in order at the very least.
Importantly, the share price decline is completely at odds with the trading outlook. The company issued a robust first-quarter trading update in April alongside full-year results that were bang in line with the forecasts I outlined at the start of the year when Flowtech’s share price was 162p ('Primed for gains', 29 Jan 2018). There was lots to like in both announcements.
The company made no fewer than six acquisitions in 2017, which propelled revenues up by 46 per cent to £78m in 2017, and supported a 24 per cent hike in adjusted pre-tax profit to £8.7m. And there is an organic growth story here as Flowtech’s like-for-like sales increased by 8 per cent in 2017. In the first-quarter trading update, the company’s revenues rose by half to £26.5m of which over 6 per cent was organic growth with the directors highlighting “positive momentum across all divisions”.
Flowtech’s main distribution business offers over 100,000 individual product lines to more than 80,000 industrial maintenance, repair and overhaul end-users in the UK and Benelux, and has maintained last year’s organic 6 per cent sales growth rate into the new financial year. It has even pushed through price rises to provide a further boost in the current quarter. Order books for Flowtech’s Power Motions Controls business (which designs, assembles and supplies engineering components and hydraulic systems so has more project-based work), remain “ahead of the same point last year”.
Flowtech sensibly priced complementary acquisition of Leicester-based Balu Limited offers operational upside, too. The £10.2m consideration, funded by a placing at 170p a share, equates to a reasonable seven times last year’s operating profit. The business comprises two subsidiaries: Beaumanor Engineering, a Leicester-based fluid power equipment distributor and a competitor to the company’s Flowtechnology business; and Derek Lane, a specialist fluid power engineering business that has crossover with Flowtech’s Power Motion Control division. Balu has widened Flowtech’s customer base, provides opportunities for cost savings in the catalogue business, and adds a second logistics centre in Leicester to improve supply chain management, and stock purchasing. There are cross-selling opportunities for Flowtech’s own-branded products, and scope to enhance Balu’s margins.
Having boosted its share of the UK and Irish fluid power market to 10 per cent through a series of bolt-on acquisitions, Flowtech’s directors are now focusing on driving operational improvements in the business this year. Factoring in a full-year’s contribution from last year’s acquisitions, and from Balu, too, analyst Andy Hanson at brokerage Zeus Capital believes that Flowtech should be able to lift adjusted pre-tax profit from £8.7m to £11.4m on revenue of £108m in 2018. On that basis, expect EPS of 16p, up from 14p in 2017, and a dividend per share of 6.1p, implying the shares are rated on a modest forward PE ratio of 10 and offer a 3.9 per cent prospective dividend yield.
It’s worth noting that with Flowtech’s net debt equating to a comfortable 20 per cent of the company’s net assets of £75m, then the directors have headroom to explore acquisition opportunities in new geographies with a view to replicating their successful UK business model in the €12.6bn (£8.8bn) European market. Bearing this in mind, Flowtech has strong relationships with key global suppliers – Parker Hannifin (US:PH), and Eaton Corp (US:ETN) – to leverage off.
Trading on a rating 40 per cent below the average forward PE ratio of its UK peer group, which includes Trifast (TRI), Diploma (DPLM) and Electrocomponents (ECM), I continue to rate Flowtech’s shares a buy at 159p, and have a conservative 205p target price. Please note that I first advised buying the shares at 118p ('A fluid performance', 2 Jun 2014), since when the board have paid out total dividends of 17.69p a share excluding the final payout of 3.85p for 2017, which goes ex-dividend on Thursday 7 June. Buy.
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