It is unfortunate that some investor/share tipster websites feel it necessary to rush into print, so to speak, minutes after a company statement has been released to the stock exchange. This practice can result in confusing signals to potential investors who may not be familiar with the company’s story.
On September 19 London AIM listed Flowgroup plc, the energy supply group, put out a voluminous interim results report for the six months ending June 30 2017. At least three popular websites aimed primarily at so-called ‘retail investors’ put out brief notes with headlines like “Flowgroup boss triples his holding in the company as its losses widen.” One of them even said: “Insider buys shares as losses widen”.
These headlines, taken at first glance, could be taken to mean Flowgroup CEO Tony Stiff was attempting some kind of vainglorious exercise to bail out the company as it was going to hell in a hand-cart. Stiff purchased on the day the results were released 11,233,131 ordinary shares of at an average price of 0.8676p per share. Following these buys Stiff’s shareholding is 16,848,877 shares representing approximately 1.184 per cent of the company ordinary share capital. So nothing irregular here.
And this is hardly a bail-out style stake. If the authors of the stories about Flowgroup had taken the time to read more of the interim report they would have realised the company has been in a form of corporate hell for the past six months, but is now back from there, fully-bailed out, re-financed and with a lot to look forward to.
In February 2017 Flowgroup still believed it had a ground-breaking and potentially lucrative product on its hands. The product is the patented microchip combined heat and power Flow Boiler (microCHP), which uniquely, it is claimed, could create electricity while heating the home.
The company put a lot of its chips down on the boiler thinking that it had a winner on its hands. But it was not to be, the British government withdrew the subsidies for such boilers and it became uneconomic to market them in the UK.
Having spent so much on developing the boiler that was not revenue generating, what was Flowgroup to do to ease the financial pressure? There was a fall-back position.
While developing the boiler, the group had also become an energy provider with its Flow Energy division. Flowgroup is one of the more than 20 small energy companies which have taken advantage of the opportunity laid out by the Competitive and Mergers authorities (CMA).
The CMA, in a report found that the so called ‘Big Six’ utilities (SSE,E.ON EDF, npower, Scottish Power and British Gas) that dominate the UK power supply market were overcharging for their energy provision. Consumers, the CMA said, should switch to cheaper suppliers.
The company threw its hat into the ring. By the end of 2015 Flowgroup had 100,000 customers on cheaper rates than the ‘Big Six’. The company continued to grow. Revenues for the six months to June 30 2016 were up 104 per cent to £41million (H1 2015: £20.5m). The solution to Flowgroup’s financial problems appeared to be to sell the energy division.
But, in an unexpected twist to Flowgroup’s story, this became unnecessary as two US funds, Palm Ventures and Lombard Odier offered to invest in Flowgroup to the tune of £25.3m after expenses on the grounds that the company would be exclusively focused on building a profitable energy supply business.
And this, as the interims results show, is what Flowgroup is doing. The microCHP division has been heavily downsized to pilot operations in European countries where subsidies are better than in the UK.
Customer fuel accounts as at June 30 2017 were 255,000 representing an estimated revenue of £141m on an annualised basis. But there are still the losses. Operating losses before exceptional items rose £2.8m to £10.8m in the first half 2017
The problem here has been that wholesale prices for energy began to rise steeply in recent months because of the devaluation of the pound. Many new small company entrants to the market had no supplies of their own and had to buy energy expensively, often on the spot market. Costs crossed over with income from the cheap deals on offer to undercut the big six. Flowgroup was largely protected from this because it hedged its energy purchases through a long term deal with Shell. But there were other pressures on its margins, like legacy Green subsidies and hence continuing losses.
House Broker Cenkos says that the losses should reduce as pressure on margins alleviates when customers roll onto new contracts. Cenkos has forecast an EBITDA breakeven towards the end of 2018.
The share price for the £13.88m market capital company closed last evening at 0.79 pence so it has made something of a recovery from the 52-week low of 0.76p. But it is a long way off the year’s high of 11.45p.