2015 to be a 'watershed' year
Flowgroup is a pioneering energy products/services business. Its patented combined heat and power (CHP) micro 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. Last week the company finalised a £21m placing and £1.2m open offer (1 for 34) at 28.5p/share in order to accelerate the growth of its "game-changing" technology. We think this move makes absolute sense, since Flow' boiler has the potential to transform the global boiler market. This view is seemingly shared by Jabil (NYSE: JBL) - a global contract manufacturer with 2014 turnover of $15.8bn - who have agreed to produce 500k boilers, and stumped up £7.4m in the placing for an 8.1% stake. In terms of today's 2014 results, Flow achieved revenues and EBIT of £33.4m and -£10.0m respectively (nearly all Energy related), which was slightly better than our projections, with December net cash closing at £6.2m (or £8.4m gross). Looking ahead, due to CE certification being received slightly later than planned, our 2015 and 2016 forecasts have been trimmed to 15k (from 20k) and 35k (from 45k) units respectively. Using a DCF valuation, a 15% discount rate and a 9x EBITA multiple for the terminal value, we reiterate our target price of 100p per share. Moreover the cost of capital should decline as the business matures and new cheaper lending facilities are brought on stream.
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