Strategic review of mCHP division continues
​Flowgroup is a pioneering energy products/services business. Indeed with its compelling mix of competitive domestic tariffs, some of the world’s most exciting heating products and a growing connected home offer, we think it is at the vanguard of the transition towards digital power.
With many political distractions, it appears the Department for Business, Energy and Industrial Strategy (or BEIS, formerly DECC) has been duly affected and may not now reach a final verdict on its proposal to reduce the number of mCHP boiler installations that can benefit from Feed-in-Tariffs (FiTs) until early next year (from Q4’16 previously). Clearly any delay would be frustrating given the importance of these subsidies, and it has also led to an extension of the Board’s strategic review, with any decision on the mCHP business expected in due course.
More encouragingly, today’s update confirmed that Flow’s technology was both relevant for its domestic market and performed better than rivals in terms of switch-on time. More broadly in 2014, the Cogeneration Observatory and Dissemination Europe predicted that mCHP could take 1/3rd of the estimated 8m pa European boiler market by 2030.
That said, under a worst case scenario Flow may instead have to wind-down its entire mCHP interests, which could be “materialâ€. As a result, the Board has prudently chosen to further curtail volumes, leading to a decline in our 2016 and 2017 forecasts to 80 (from 500) and 3,000 (from 10,000) units respectively. Nonetheless, we are encouraged to hear management will soon begin marketing the 800 devices that have already been manufactured.
Elsewhere, Flow Energy continues to go from strength-to-strength, successfully differentiating itself in the UK power supply industry. In fact, at the interims the company reported it had increased its customer base by 155% from 100k on 1st January to 255k as at 1st September, with the latter set to deliver annualised revenues of circa £127m, equivalent to ARPUs of around £500 pa.
For our overall numbers, 2016 revenues, adjusted EBIT and closing net cash are now anticipated to come in slightly lower than previously envisaged, at £96.2m (vs £103.4m), -£24.4m (vs -£23.4m) and £5m (vs £5.7m) respectively. As such, our sum-of-the-parts valuation falls to 39p (from 42p) per share. Albeit this figure will need to be revisited again once the strategic review is finalised.
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