Specialist technical fluid power products supplier Flowtech Fluidpower PLC (LON:FLO) has become the latest company to blame a profit warning on the EU referendum result.
The company said the outcome of the EU referendum had disrupted markets, and that mid-year trading in distribution markets that the Flowtechnology division supplies had been more challenging than expected, as a result of which full-year results are likely to be marginally below market expectations.
The board reassured investors that it remains committed to a progressive dividend policy.
Flowtech said revenue in the first half of 2016 grew by around 28% to £27.4mln from £21.4mln in the first half of 2015, with the Power Motion Control division doing most of the heavy lifting, as that unit's sales more than doubled to £8.3mln from £3.9mln the year before.
Bolt-on acquisition
The tougher market conditions did not stop the company whipping the cheque book out to buy hydraulics specialist Triple Six Limited (TSL).
Based in Yorkshire, TSL is a specialist designer and distributor of several ranges of hydraulic cylinders and semi rotary actuators to a wide variety of industries including civil engineering, railways, nuclear and marine. The company will be subsumed into Flowtech’s Power Motion Control (PMC) division and will remain under the leadership of its managing director and founder Steve Rushworth.
In 2015, TSL turned a profit before tax of £0.15mln on turnover of £1.2mln, and had assets at the end of that year of £0.5mln.
Flowtech is set to pay up to £1.1mln for TSL, which had a positive cash balance of £350,000 at the time of the acquisition. It will pay £450,000 up-front, with the rest of the consideration being contingent on the performance of the acquired business over the next two years.
"The acquisition of TSL continues the development of our PMC division and further enhances our offer to the power and motion control market. The acquisition again widens the customer sectors we serve,” said Sean Fennon, chief executive officer of Flowtech.
“This is our third acquisition of 2016 and sixth overall since we came to market, and we are confident of further progress with our acquisition strategy before the end of the year," he added.
Watch: Flowtech Fluidpower CEO on “wide pipeline” of acquisitions
The news knocked the shares leaving them even more significantly undervalued than those of sector peers, according to finnCap.
The shares are still worth buying on valuation and yield grounds
The broker still thinks the shares are worth buying, though it admits that, given recent lacklustre trading, the shares might drift in the short term.
It has reduced its price target from 187p to 170p but expects some earnings-enhancing bolt-on acquisitions will provide some upside to its earnings forecasts and could get the share price moving in the right direction.
House broker Zeus Capital also drew attention to the shares being valued on a lower earnings multiple than their peers: Flowtech is valued at just eight times new full-year earnings per share while its peers trade on a multiple of 14.7, and the reward for holding the shares is a prospective dividend yield of 5% that is twice-covered by earnings and is expected to grow 5% year-on-year, according to Zeus.
Zeus has cut its current year earnings per share forecast by around 6% to 14.2p and next year’s by 2% to 15.5p. Estimates in 2018 increase on the back of the acquisition of TSL announced this morning.
“Industry data indicates volume across the hydraulic and pneumatic sectors was down 6% in the five months to May and recent developments appear to be extending weakness into H2 [the second half],” Zeus noted.
“The recent circa +20% weakness in the shares reflects wider sector concerns and was potentially factoring in a larger decrease to forecasts than today’s 6%,” the broker ventured.
Going into bat for its client, Zeus Capital said the business is cyclical and will be affected by periods of economic turbulence but the current multiple fundamentally undervalues the recent growth of the business and the potential for future development going forward.
By late morning, shares in Flowtech had recovered to 106.79p, down 3.4%, having fallen as low as 96.5p at one point this morning.