SIF Portfolio: Will Flowtech Fluidpower perform under pressure?

Wednesday, Jan 04 2017 by
28
SIF Portfolio Will Flowtech Fluidpower perform under pressure

I wasn’t expecting to find any new stocks in my screen when markets reopened after the New Year break, but to my surprise there was one new addition. Flowtech Fluidpower is a leading distributor of hydraulic and pneumatic parts to industrial customers in the UK and Benelux. It listed on AIM in May 2014 and has grown steadily since, thanks mainly to six bolt-on acquisitions.

Flowtech shares fell sharply following the EU referendum, but there’s no evidence yet of any meaningful disruption to trading. Although the group did issue a minor profit warning in August, trading appears to have stabilised since then.

Sales rose by 28% to £27.4m during the first half of last year, while underlying operating profit was 19% higher at £4.1m. Small cap editor Paul Scott was impressed by Flowtech’s interim results in September. You can read Paul’s take on these figures here.

Although recently listed AIM companies with acquisitive strategies have a very mixed record of success, I’m comfortable that Flowtech Fluidpower is a credible investment. Debt levels are under control and cash generation appears fairly strong. Stockopedia’s computers also like this share, which has a StockRank of 95.

Should I add Flowtech to the Stock in Focus portfolio? Let’s take a closer look at the numbers.

Tempting value and income

Flowtech Fluidpower certainly looks cheap. The stock trades on 10.9 times trailing earnings and boasts a ValueRank of 86. The group’s trailing dividend yield of 4.2% is also well above the AIM market average of 2.4%.

Here’s the usual snapshot showing the breakdown of Flowtech’s ValueRank (remember that you can access these by clicking on a stock’s Rank numbers on its sector page):

586cc309ce19fF2.png


An earnings yield of 8.4% is just above my minimum threshold of 8%. If the shares rise further then this stock could drop out of my screen, but that’s not an issue at the current price.

From the fact that the P/FCF is higher than the P/E ratio, we can tell that free cash flow has fallen significantly below earnings over the last twelve months. What’s happened is that operating cash flow fell to just £0.2m during H1 2016. However, Flowtech’s interims suggest that the shortfall in cash flow during the first half was largely a result of working capital movements related to the purchase of…

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Flowtech Fluidpower plc is a United Kingdom-based distributor of technical fluid power products. The Company operates through two divisions: Flowtechnology, which is geographically split into Flowtechnology UK (FTUK) and Flowtechnology Benelux (FTB), and Power Motion Control (PMC). FTUK and FTB focus on supplying distributors and resellers of industrial maintenance, repair and operation (MRO) products, primarily serving urgent orders rather than bulk offerings. The PMC division is engaged in the design and assembly of engineering components and hydraulic systems, which are managed by component supply along with a service and repair function. Its business is focused on its distribution offering in over three categories: Pneumatics (products that enable the use of gases to provide mechanical motion), Hydraulics (products that enable the use of fluids to provide mechanical motion) and Industrial (products and accessories that act as conduits for gases and liquids). more »

LSE Price
140p
Change
5.3%
Mkt Cap (£m)
81.2
P/E (fwd)
8.1
Yield (fwd)
4.9



  Is LON:FLO fundamentally strong or weak? Find out More »


10 Comments on this Article show/hide all

Warranstar 4th Jan '17 1 of 10
1

Hi Roland.
I came to a similar conclusion in Sep 2016 and bought some.
Amongst other things I also found
1) The discount to sector was high for no apparent reason
2) Magic formula score was A-
3) EPS forecast of +30% for year to end Dec 2016 looked encouraging

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Howard Adams 4th Jan '17 2 of 10

Hi Roland

I also bought in last year and added a little during the year.

A consideration I noted, both a positive and a negative, is that over 75% of shares are held by ten trusts and that key insiders hold less than 1%.

On the one hand could this suggest a concerted push to evolve this sector through the development of Flowtech Fluidpower (LON:FLO) , perhaps?

Or, does this suggest caution with shares concentrated in a few hands whereby if tone or more move fast their actions will have a tangible impact on the share price?

Regards
Howard

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Roland Head 4th Jan '17 3 of 10

In reply to post #164817

Hi Howard,

Thanks for your comment. I'm encouraged by the high level of institutional ownership. I see it as a vote of confidence from well-regarded fund managers, who are all likely to have in-depth and regular access to Flowtech Fluidpower (LON:FLO) management.

Investors could run into liquidity problems in volatile markets, but that's not uncommon with small stocks and is a risk I can live with.

Regards,

Roland

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topvest 4th Jan '17 4 of 10

Thanks - a good analysis. I've got this on my watchlist. If you look back at the core business its remained profitable for well over a decade even in the depths of recession. I went through their accounts at Companies House a few months back. I've held off from buying though as I think the price has rebounded a little too far, given the obvious mild profit warning risk. Hoping to buy when the right opportunity surfaces.

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Sniggolb 5th Jan '17 5 of 10

excellent analysis and thanks

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AnonymousUser41492 5th Jan '17 6 of 10

great analysis - it's going on my watch list.

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Ron1302 23rd Jan '17 7 of 10

Is there anything that has prompted todays drop?

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herbie47 23rd Jan '17 8 of 10

In reply to post #168142

Trading update.

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Mancman 12th Oct '17 10 of 10

Flowtech has announced another acquisition:

https://uk.advfn.com/stock-market/london/flowtech-FLO/share-news/Flowtech-Fluidpower-PLC-Acquisition-of-Group-HES/75844789

It will be releasing its Q3 Trading Update on Tuesday 17 October 2017.

The news  seems to have been anticipated by the market for a few days. It has today traded at an all-time high.

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 Are LON:FLO's fundamentals sound as an investment? Find out More »



About Roland Head

Roland Head

I'm a private investor and writer on stock markets, with a particular fondness for free cash flow, dividends and value. I also have an interest in (profitable) commodity stocks.  I hold the CFA UK Investment Management Certificate (IMC). One of my investment interests is developing rules-based strategies such as my Stock in Focus portfolio. This reflects a significant part of my personal portfolio and is the subject of my weekly column here at Stockopedia. In earlier life, I worked as an engineer in telecoms and IT. The rules-based approach required for this kind of work undoubtedly influenced my investing style. I also learned a lot from seeing the tech bubble deflate in 2000-1, when I was working for a large and now defunct Canadian firm.  more »

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