114% jump in power customers in 1st half
​Flowgroup is a pioneering energy products/services business, which we think could transform the global boiler market. Its patented combined heat and power micro (mCHP) boiler is half the price of comparable products, and enables households to save literally £000s on their fuel bills over the life of the appliance. It is also environmentally friendly and helps smooth peak electricity demand for the National Grid. The boilers are to be sold via both 3rd party installers and the firm's own in-house energy services arm.
Today, finding companies that deliver rapid organic growth is becoming increasingly difficult for investors. Yet Flowgroup this morning said it had experienced a demand surge in its domestic power supply business, with account numbers up 114% in the first 6 months alone to 214k (vs 100k Jan) - equivalent to annualised sales of £106m (vs £43m in 2015).
This progress has come from offering competitive tariffs tied to award winning customer service. A successful strategy that has taken share from the Big Six providers, and who now in aggregate possess 84% of the market, down from 98% in 2013. Going forward, we think this customer migration will continue, with Flow predicted to become "profitable in 2018" based on 650k energy supply accounts.
We also see substantial upside too from its partnership with Daikin, where we understand Flow could (not unrealistically) be selling between 100k-200k "smart hybrid" boilers annually in the medium to long term. Once again by leveraging its extensive "Brand Ambassador" network, as well as diversifying risk by further broadening its existing product/service portfolio.
For micro CHP boilers, the consultation period is scheduled to end on 7th July, with a final adjudication due sometime in the autumn. That said, even in the event of a negative decision, we believe the Board would still have plenty of options open to it.
We make no change to either our projections or 42p/share price target, and anticipate that net cash (post the £2m interest-free Battelle loan) will close H1'16 at ~£12m. Our sum-of-the-parts valuation is predicated on a 1.5x 2017 revenue multiple for the mCHP division and a valuation of £250 per fuel account. Conservatively, this assumes nothing for either the Daiken relationship and/or other attractive partner deals that may be signed in due course.
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