As we wrote just over a week ago London AIM-listed Flowgroup’s preliminary results for 2015 announced today were expected to focus on problems caused by the EU inspired proposed changes to VAT on its breakthrough Flow boiler.

This has turned out to be the case. Speaking on the announcement of the results the company said it had to cut costs and compensated by trying to increase customers in its energy supply arm. The flagship Flow boiler is a potentially ground-breaking patented micro- combined heat and power (mCHP) boiler which generates electricity while heating the home.

The company, two weeks ahead of the release of the results today had what used to be known as a Red Letter Day on April 14 when it announced installations of its Flow boiler had been completed in customer homes.

Flowgroup challenges “big six” energy suppliers with cheaper electricity photo:

Flowgroup CEO. Tony Stiff was clearly thrilled about this new development. He said “We are excited to be involved in making history by installing a real world’s first –- an affordable, electricity-generating boiler”. He said it is designed to become the leading domestic heating technology worldwide.

It has been a long time arriving. It was launched in January 2015, but progress towards commercialisation seemed to be stopped dead in its tracks when the EU decided last June there should be an increase VAT on domestic renewable energy products from 5 per cent to 20 per cent which would mean the price of a Flow boiler would go up to £3,500 instead of just under £3,000.

The company was hit. The share price having been 30.25pence fell to 10.13p by the beginning of this year, But Flowgroup had another string to its bow. It had become an energy supplier.

The background here is that the big six energy Group in the UK, E.ON, SSE, British Gas, Scottish Power. RWE npower and EDF, have been of over-charging as they are effectively a cartel. The Competition and Mergers Authority(CMA) were asked to look into the situation.

The CMA declined to tackle the problem head on and decided instead that it was up to the consumers themselves to switch suppliers. This allowed a number — up to 20 in fact­­­­­—of small groups such as Ovo, Good Energy and Flowgroup to grow into the market.

Flowgroup was helped in its endeavours by a crucial deal with Shell, in which Shell will provide Flow’s energy supply divisions with wholesale gas/ electricity on extended credit terms for the next five years (with an option for another three depending on volumes).

The power supply business has made great strides, increasing its customer base from 100,000 as at the end of 2015 to 170,000 by the end of the first quarter this year and has now reached 180,000. This division is the main earner having, according to broker Equity Development, Revenues for 2015 were £40million compared to £33m in 2014.

This is all very good for the group’s cash flow. Put together with an equity raise of £21.3m in a share placing and open offering including £7.4m from its boiler manufacturing partner Jabril, Flowgroup has a strong cash position. Operating losses, however, rose to £17.1m in the year to December 2015 compared to £10m a year ago, largely through costs associated with the development of the boiler.

Buoyant though the supply business remains, it is the Flow boiler which could be the real game-changer for the company. The announcement of first installations came hard on the heels of word that boiler has received MCS accreditation (Microgeneration Certification Scheme).

This means it can now be installed in UK households with the knowledge that the low carbon electricity it produces will qualify for government subsidies in the form of Feed-in-Tariffs.

Industry sources believe that the EU will back-track on (it’s probably too hasty) decision to increase the VAT and, under pressure from UK politicians revert to the 5 per cent level. In the meantime the company has installed its first boilers at 5 per cent VAT and will continue to do this and see what happens.

Broker Equity Development has said there could be a market of 10,000 boilers in lowgroup generating turnover of £42m rising to 35,000 customers in 2017 and a remarkable income of £135m.

ED says: “There have been some very encouraging developments, but we have prudently held our 2016 forecasts and a 41pence a share target price for now.

Although revenues rose considerably in 2015, losses also rose sharply  because of the extra costs involved in increasing staff numbers and investment in developing the Flow bolier to £17m compoared to £10m for the year ending December 31 2014.

The shares in Flowgroup fell 4.50p (17.82per cent) to 20.75p on today’s news

Stuart Dalby (04/11/17)