Maximising shareholder value
​In November Flowgroup kicked-off a strategic review of its mCHP boiler following the UK government’s shock decision to slash Feed-in-tariffs (FiT) - compounded by sterling’s devaluation vs the $/€, leading to a 17% increase in manufacturing costs.
The good news, however, is that this innovative product still has an attractive future ahead of it, especially in Europe where environmental subsidies and installation incentives tend to be more generous. Both Trillary of Italy and Gaz réseau distribution in France (GRDF) have already shown considerable interest – and today we understand Engie (EDF), one of the world’s biggest energy suppliers, is also keen.
Favourable mCHP prospects in Europe
This is not small potatoes, either. For instance, the Cogeneration Observatory and Dissemination Europe predicted back in 2014, that mCHP devices could take 1/3rd of the estimated 8m pa European boiler market by 2030. Consequently, rather than prematurely selling or closing the division, the Board have chosen to progress field trials with its overseas partners across France, Germany, Italy and Belgium, with the aim of launching the boiler commercially in 2018.
It is worth noting too that in the event of closure, there would be significant one-off charges - possibly in excess of £10m, albeit cash payments would likely be spread over >12 months to cover inventory/capex write-offs, Jabil exit fees and redundancies. The existing stock of 1,000 mCHP units will be deployed in these forthcoming pilots with the remainder ear-marked for the UK, in order to recoup production costs, reduce inventory and generate useful performance data.
Disposal of Flow Energy being actively pursued
That said, the mCHP division will remain loss-making for the foreseeable future, and so requires ongoing support. Therefore, after receiving unsolicited approaches for Flow Energy (FE) from several interested buyers, the board has decided to explore the potential divestment of this division.
It is impossible to accurately predict the ultimate sales proceeds, suffice to say that the directors believe any disposal would generate sufficient cash to fund the mCHP unit through to its commercial launch. Indeed, we suspect any transaction would be concluded at a level north of Flow’s current marketcap - and perhaps much higher - given we had previously valued FE at £250/customer (or £225, net of Shell warrants) based on historical deals of this type.
In relation to timings, the auction should be finalised by the prelims in May – albeit, if not by then, the “the Directors will consider a number of [other] funding options, including selling a strategic stake in either FE, the mCHP business or through a placingâ€.
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