FLOWGROUP PLC:- too good to be true or the next growth company?

5th Mar '14 by Orangetree

5 comments 8620 reads

As the saying goes, ‘If something looks too good to be true than it is probably too good to be true’. But is this the case with Flowgroup Plc, the creator of the first so-called ‘smart boiler’ or more specifically a smart mircoCHP boiler. Looking at the company’s website I could definitely attest that the customers are definitely getting a good deal because they’re getting the boiler for free only paying £1,000 for installation costs; on the flip side the customer could achieve £200 in savings/year as the boiler can generate electricity to be distributed back to the grid through the participation in feed-in-tariffs. Hence why the company is claiming you could get back your money in five years’ time, although much depends on the usage in your household.

But can the same thing be said for investors?

Although the company is not making a profit yet, the business is being valued at £66m where the share price is 27p/share, this is near their 52-week high of 30p/share and off their 52-week lows of 9.75p/share which was set October last year. Based on my personal opinion the company is a buy, if certain objectives are met and management update us with useful information that we could quantify the future value of this business (more about that later).

The Boiler Market

Based on the company’s website around 1.6m boilers are replaced in the UK generating £2.4bn in sales (though some sources gave a figure of 1.2m in replacement still very big) and in Europe it is 9m boilers with sales value of £13.5bn.

But let focus in the UK market for simplicity sake. Currently the UK has a policy of installing highly-efficient boilers since 2005, these boilers are known as ‘Condensing boilers’ where 8m have already been installed since the end of 2010. The main problem with this boiler is the longevity, it simply do not last very long compared to the old hot water tank boiler (though highly inefficient due to the numerous times we need to turn on the boiler to heat the water in the tank) but it last on average 20 years compared to the 3-6 years of the condenser boiler. You could read more about it by clicking below:

http://www.theguardian.com/uk/2010/dec/27/condensing-boilers-freeze-uk

http://www.thisismoney.co.uk/money/bills/article-1710224/Are-condensing-boilers-a-waste-of-money.html

So the market is there for better boilers, but is there a public concern about their energy bills? Based…

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Fangorn

5th Mar '14

Superb post Orangetree. Many thanks for scribbling.

It's certainly been a rapid rise. And that was before the 18% CEO large buy inspired surge this morning.

Was in two minds about buying the other day but feel it has run away from me.

If there's a reasonable pullback then I'll revisit.

Posted elsewhere....

Some chunky buys from Directors this morning(and CEO) at Flow group.

Hence the 18% rise or so!

http://www.investegate.co.uk/flowgroup-plc/flow/director-pdmr-shareholding/201403051020465755B/?fe=1&utm_source=FE%20Investegate%20Alerts&utm_medium=Email&utm_content=Announcement%20Alert%20Mail&utm_campaign=Flowgroup%20plc%20Alert

cig

I fear the argument that condensing boilers "last 3 to 5 years" is a bit overdone: surely the poor installation, high cost parts, and maintenance issues will improve as the plumbers get more used to them and the products mature -- they are mass market now. I would expect the say 2010 generation to already be better than the original 2005 one for instance. Supposing that funky and untested micro-CHP tech won't have any of these problems seems unduly optimistic. Any new boiler tech will have a hard time competing, as it's hard to compete on efficiency (not much left to improve) and the infrastructure of the mainstream tech (all these plumbers who prefer the classic tech are not going to like the fancy stuff either!).

Re energy policy, it's not clear that micro-CHP presents any advantage at the system level compared to condensing boilers + gas fired power stations. Policymakers may not be inclined to support something that doesn't materially help.

On competition, I would expect most major industry participants to have micro-CHP programmes on stand by that they will deploy if someone proves the market is worth it, so if it works out the competition may come in before the first movers have time to make enough return.

I've not checked up again, but last time I looked at it the Jabil deal seemed potentially unfavourable to shareholders, as if I understood it right basically Jabil gets the company and tech if anything goes wrong during development, which seems fairly likely.

Orangetree

Afternoon all, yes the effieciency of the condenser boiler is pretty high probably in the high 90's(%), Flow's boiler efficiency is roughly in the 90's also. My question would be if the boiler is so high in efficiency why are our energy bills so high?
My concern as I have mentioned in the article would be the longevity of these boilers so is the management job to give us an estimate.
We definitely need details on the Jabil deal apart from the vague suggestion of assisting flow in their working capital.
Competition-wise the company has patented their technology worldwide, unless these major competitors come up something even more better then I can't see them wasting R&D money.
Technically the stock is overbrought (I only undersatand basic TA), but I will admit this stock is news driven @ the moment.

Beginner

3rd May '14

Trade this if you like, but it may be best not to invest here. The performance stats for domestic boilers are extremely unreliable. Conventional boilers are almost as efficient as the condensers, and given the differential in price , for most people, a conventional model is a better buy. I would be reluctant to place too much confidence in the figures given for these new systems. I write as someone who used to work in this area,and who still has friends who do. They are all remarkably unimpressed with the newer systems, which tend to be less robust and never as efficient as advertised.

garbetklb

4th May '14

I'm pretty sure you no longer have the option to choose a non-condensing boiler.....

FLOWGROUP PLC:- too good to be true or the next growth company?

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Orangetree

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