Over-reaction to proposed reduction in FiTs
​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.
Any sharp fall in shares can offer good opportunities for risk-tolerant investors prepared to take advantage of an over-reaction. We believe this is the situation for Flowgroup after it was forced last Friday to issue an impromptu statement saying that the Department of Energy and Climate Change (DECC) had suddenly proposed to cut the number of UK mCHP boiler installations which can benefit from Feed-in-Tariffs (FiTs) from 30,000 to 1,560 units in 2017, 1,560 in 2018 and 390 for 2019.
Although clearly "disappointing" news, we think that - thanks to Flow's overseas expansion plans and successful diversification into domestic Energy Supply and 'smart' heating products (eg Daikin partnership) - any fallout from this potentially negative move will be, at worst, manageable.
In fact, at the prelims last month, the Board quietly mentioned that it was hopeful of selling some of its revolutionary 'electricity generating' mCHP boilers in Italy towards the end of this year - a full 12 months ahead of our forecasts. The Italian market is Europe's 3rd largest, representing >600k units pa, offering attractive incentives for low carbon heating systems, covering up to 65% of the cost of each device.
Flow's home energy business continues to go from strength to strength, with currently >200k customers registered or being processed. So we make no change to either our projections or 42p/share price target - with the latter based on a 1.5x 2017 revenue multiple for the mCHP division, a valuation of £250 per fuel account and anticipated Dec'16 net cash of £5.9m. Furthermore, this prudently ascribes zero value for the rest of the group - thus potentially offering further upside from the Daiken relationship and other attractive deals that may be signed in due course.
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