Flowgroup ...... painful after thoughts

Production of boilers now increased from 390,000 to 500,000. This could be quite exciting. Personally if my boiler conked out & needed replacing, I would certainly consider getting one of these to replace it. Also a good possibility of manufacturing them in another country cheaper than the UK with cheaper labour costs. Good prospects ahead for this company.
Lightningtiger

18 Nov. Started production of its boiler. !0, 000 customers express interest
Sales and PR in effect starts January
Now it gets interesting

What appeals to me is the product itself which has the benefit of producing electricity as well as heating. That has to be a huge advantage in itself for the company. From Stockopedia, it shows revenue growth estimated from £33.4M this year to £128,2M estimated for 2015. The C.A.G.R shows +236.4%, which again is extremely impressive. The sales growth shows off the scale @ 3332%, which is off the scale!
So putting it to the Dragons Den for a vote there is still a lot of unanswered questions to be asked by them and Paul, as well of the rest of us..
At least it has a patent on it so anybody coming up with another similar boiler will come unstuck. I am holding shares in FLOW because of the huge potential it has, hoping the CEO is not going to cream all the profits for himself.
Cheers Lightningtiger

Tourn, thank you for a really helpful post.

Hi Tourn,

I'd be interested in those analyst reports as well if it's okay. Have been "In and Out" of Flow, buying in 30's, selling in 40's but undecided as to whether to hold a LT stake.

Interesting business with multiple opportunities to make money. The smart boiler - isn't Lenigas pursuing a similar smart chip boiler. Was thinking about Flowgroup for boiler at home but some of the comment here and elsewhere have put me off.Sounds like a great deal of hassle.

Hi

I think I've got some recentish analysts' reports somewhere - could send them to you if you're interested......

Hi rg,

Thanks for the illustration, which helps me understand the business model.

I understand the intermediation side of the business, but am not clear about the value of the 'enhanced recovery' proposition.

This seems a bit like capturing the economic value of otherwise flared gas......but I wonder how much the electricity generated by a small fan in a domestic boiler exhaust is actually going to be worth ?

There's surely going to be a big issue of 'intermittency' ? We don't use our domestic boiler for more than an hour or so per day in the summer - if that - and only a few hours, for central heating, in the winter.

I struggle to see how the energy capture in this scenario would do much more than power a light bulb ! However generously the tariff, it would take quite a while to recoup the original cost of a boiler (esp. with the exhaust capture 'bolt-on'), no ?

What am I missing ?
ATB

I wonder if everyone commenting here has the same understanding? Some comments seem to reflect a degree of misapprehension.

AIUI Flow has two separate business lines.

1) supply of energy to retail customers - Flow buys energy on wholesale markets and supplies to retail customers who switch from other suppliers. Flow tariffs are ultra competitive and tariff structure is very simple. This operation was launched in support of the boiler business but has been more successful than was anticipated, so consideration is being given to ramping it up. Given that Flow is buying wholesale and selling retail the business model is pretty simple. The advantage enjoyed by Flow is primarily that it has no legacy assets - no generating plant, no transmission network, no sales and marketing infrastructure, no large database to maintain, no bad payers, etc etc etc. So no legacy of problems or under-utilised capacity. Just a clean piece of paper and a new call centre operation. It seems to be easy to buy energy wholesale from generators/providers and then distribute it via sales to existing infrastructure owners and there seems to be a decent margin which allows Flow to compete on price with established players. AIUI Flow is playing the same game as Easyjet or Lidl but without having to own any infrastructure beyond a call centre and a billing system.

2) manufacture and sale of innovative new boiler which - pace Paul Scott - extracts energy from exhaust gases that would otherwise be vented into the atmosphere. All boilers produce waste gases which are hotter than the ambient atmospheric temperature - even the most efficient. Flow's boilers use standard boiler technology which is as efficient as any other. But they bolt on a second stage device which I think of as a turbine with blades which spin in the exhaust stream and use that rotary motion to generate electricity. This electricity is effectively free - at least in terms of input energy cost (obviously apart from the manufacturing/inistallation/servicing costs of the second stage device). AIUI therefore Paul is wrong to say that the boilers are less efficient than conventional boilers. The gas heating bit is more or less identical to conventional boilers. It's what happens in the second stage that makes Flow's boilers different.

The electricity generated is fed back into the domestic supply and is used in the first place local to the boiler - ie by the boiler owner's home. If it is surplus to requirements then it is fed back into the national grid and attracts payments from the grid. This is exactly the same approach as for solar panel installations. If the former, it will reduce the electricity drawn and hence charged for. In latter it will generate receipts.

AIUI Flow would be perfectly happy to sell a boiler to a cash customer who would then find his/her electricity bills reduced by the electricity generated by the boiler.

However, Flow has come up with an alternative approach which saves customers from having to fund the purchase and installation of a new boiler. In this approach the boiler is supplied and fitted free of charge - ie at Flow's expense. - The electricity which is generated then belongs to Flow who effectively sell it back to the customer as part of an electricity supply contract. In all probability additional electricity will drawn by the customer to make the locally generated stuff up to the level required.

The beauty of this arrangement is that Flow provides very competitive tariffs anyway. So a customer who switched from another supplier to them will save money. A customer who switches and also has a new Flow boiler installed will still be saving money on his/her electricity bill and will also get the benefit of a new boiler without having to pay for it. From Flow's point of view the cost of the boiler is met by selling to the customer the locally generated electricity which is costing Flow nothing at all because it is being generated locally from waste gases which are effectively provided free of charge by the boiler owner.

Obviously the economics of this whole set up are more complex than those of a simple contract to sell gas/electricity and I have not tried to go into them in any detail.

I have recently been looking at switching my energy supplier and came across Flow in that context. I have read about their boilers and I think the whole proposition sounds interesting. I have not yet reached any conclusion and have not bought any shares.

I'm not sure where the c. 50,000 signed-up customers figure comes from. I couldn't find any place on their website where you register an interest.

Am an electricity customer of the Flow Group. But live in a place where there is no piped town gas supply, so the boiler aspect is irrelevant.
May have been included in the signed up customers number though, referred too, wherever that is from?

FLOW Interims of 30 Sept. 2014 it states.

Our core product, the electricity-generating Flow boiler, received CE certification in March 2014 and, working closely with our manufacturing partner Jabil, our team, which has continued to improve component quality and reliability, is targeting initiating production by the end of this calendar year.

http://www.jabil.com/about_us/jabil_overview/

My guess is that Jabil have sub contracted the build of the boiler out to a small contractor(s) as I cannot see any direct mention of the fabrication, probably due to low numbers required by a pilot scheme?

But has been insinuated above, there appears to be few hard and fast figures?

Gostevie - At face value it’s an arterial red flag. But careful analysis of the small print in annual report does reveal that £538k included a bonus element. I was personally told by TS that his bonus was the lion's share of the £538k and paid in lieu of securing Jabil - i do not have a problem with that, though it will be interesting to see his salary in next year's annual report. By then maybe NRG or a European deal can justify another chunky bonus … let’s hope.

Perhaps I don't fully understand the business model, but this doesn't seem a very convincing proposition.

As I understand, high-tech boilers are provided free and the customer only pays for the installation. Over years 1 to 5, the costs of installation are recovered by electricity savings/generation. In years 6 to 10 the 50% share of the feed-in tariff taken by Flowgroup pays them back for the cost of the boiler. That is a long time to wait just to break-even on your investment.

As I see it, profit would not be made on selling the boilers. The profit is made on selling gas through deals which customers are be locked into. As a potential customer, I would be very wary on making such a longterm commitment with a gas supplier, even if I am getting a free boiler.

The longterm nature of these arrangements raises many other questions. What happens when you sell your house? Will these boilers even last for 10 years? But my biggest question is - who is financing the provision of these boilers? If this is successful as promised, this is going to involve a upfront investment. I think the business model is too aggressive - Flowgroup should be taking 50% cut of the feed in tariff from day 1 to recover capital costs more quickly.

I'm not sure where the c. 50,000 signed-up customers figure comes from. I couldn't find any place on their website where you register an interest.

It could work, but there are too many unknowns for my liking.

I agree Ramridge. This company sounds potentially interesting, but to justify a £100m market cap, I would need chapter & verse on the forecasts - e.g. how much each boiler costs to make? How much it will be sold for (presumably some financing company funds the cost initially - so what do they charge)? Then we would need to know the economics of the boiler itself - the electricity it generates doesn't come out of thin air, it comes from burning gas. So if existing boilers are already extracting a high % of the possible energy from burning gas for heat, then presumably in order to use some of that heat to make electricity, then you absorb some of the energy that would otherwise be used for heat? So it must use more gas than a conventional boiler, in order to generate both heat and electricity, surely? Is it more efficient that conventional boilers?

Then what are the economics of the electricity it puts into the grid? Are their favourable feed-in tariffs? Does it still stack up without favourable feed-in tariffs?

What are the terms for the outsourced production? Yes the manufacturer is a big name, but it's not clear what the risk:reward is there. Are there minimum order quantities involved?

What are the competition doing? There must be other competing technologies, so why will this one be commercially successful?

All in all, I think it sounds potentially interesting, but same as for Ramridge, I would need much, much more financial detail to prove up the business model before I could consider investing here.

Thanks for the write-up though - am always interested in looking at new companies.

Regards, Paul.

Hi - I had a good look at this company and I am afraid there are too many questions unanswered. For a start this is far from being an easy-to-understand business model. Basically it calls for a heavy investment from the company upfront in return for a periodic income stream from the consumer and from energy supplying partners. How this stacks up in making a profit for the company is not disclosed. The initial investment calls for the manufacturing of the boilers, training of and paying the installers, sales & marketing cost, etc. The income they receive is the margin they make on the gas & electricity contract for 5 years, and further sharing of profit from reselling the boiler generated electricity to the grid.
In the absence of any data explaining in detail how profit and cashflows stack up, you ( I mean investors) are flying blind. It requires a leap of faith. As an ex project manager, I had a plaque on my desk for all to see "In god I trust, everyone else : prove it."

ps. Nowadays I start to come out in a rash whenever I see the phrase "game-changer" or "game-changing". The company's reports are full of it. Yuk.

Even for a CEO, Tony Stiff, is unusually impressive

Given that he was paid £540,516 in the last Financial year he bloody well should be..

(See Page 30: http://flowgroup.uk.com/wp-content/uploads/2012/12... )

Steve

So as far as I can see there revenue will be from:
A Gas and Electricity sales contract. How will this compare to the big 5? Cheaper? More Expensive. What are the margins on this?
Approx £200 per household from Electricity generated for the first 5 years

It's Bull that boilers cost £1200 you can get them for £400 at plumbers merchant's, B&Q etc that will fit most homes.

The boiler looks an absolute beast in size compared to most modern boilers

They don't mention the efficiency of the Boiler, how does it compare to a modern Condensing one? i.e. If you save £200 per annum on electricity you don't want to be spending £200 plus on additional gas.

To me without more information it's a firm bargepole

Hmm.

I have only had a quick skim through but your first few lines threw me completely.

Easy to understand business     How exactly do they make money then?

Attractive business model -capital goods sold directly to consumer    But their advertising video says the consumer does not pay for the boiler?

Story still not well known or understood      I thought it was easy to understand as in point one above?

I will research in more detail later but can you start by explaining who pays the build costs of the boiler and how that is recovered?

Thanks