Hydrogen play motors on

Many UK shares involved in the green revolution can offer investors like me a chance to make some cash. This is where Proton Motor Power Systems (LSE: PPS) comes in, a business which makes hydrogen fuel cells for cars, ships and trains. It also builds stationary units to power homes and businesses, and makes hydrogen-based hybrid engines for automobiles as well.

News coming out of the company has been mightily bright in recent weeks and months. The penny stock inked its first order with Electra Commercial Vehicles last month to power a prototype refuse collection truck. It also signed another contract with E-Trucks Europe to supply seven hydrogen cell systems for a fleet of rubbish trucks.

Demand for Proton Motor Power Systems’ stationary units is also encouraging and last week it reported another order from aerospace and automotive giant GKN to supply more of its ‘S8’ autonomous fuel cell systems. GKN has now taken 25 of these systems off the small-cap’s hands.

The escalating climate crisis is supercharging the need for low-carbon electricity generation. But that’s not to say PPS is nailed on to succeed. Competition from existing power technologies, and particularly those which can be adapted to reduce their emissions, remains a problem. The company also faces intense competition from other operators in the low-carbon-electricity field.

Another cheap UK share I’m considering buying

While Proton Motor Power Systems trades well within penny stock territory, below 40p, Flowtech Fluidpower (LSE: FLO) is another cheap UK share which formerly traded under the £1 benchmark.

And it’s another one I’m thinking of adding to my Stocks and Shares ISA. But recent strength has seen it soar above penny-stock status and given it a chunky forward price-to-earnings (P/E) ratio of 21 times.

A high-ish rating like this could cause Flowtech’s shares to sink in value if market sentiment around the company starts to worsen. Still, for the time being, I think things are looking rosy for the UK firm which manufactures hydraulic and pneumatic systems used by industrial companies to create and control power. I think it can expect sales to steadily get better as the economic recovery clicks through the gears.

However, demand for its high-tech products remains below pre-pandemic levels. Revenues in the first half of 2021 remained 7.2% lower than they were in the first half of 2019. But business is starting to snap back sharply and, for the six months to June, sales were up almost 20% from a year earlier.

Remember however, fresh flare-ups in the global health crisis could derail Flowtech’s recent rebound. They could threaten to damage the bounceback in the UK engineering share’s global end markets, not to mention disrupting its supply chains.

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Watch out for fresh financials!

I think buying Flowtech Fluidpower (LSE: FLO) could be a good idea before it updates the market around the time of its annual general meeting on 3 May. The company’s share price has now recovered all the ground it lost following the 2020 stock market crash. Its latest forecast-beating update a month ago leads me to believe another sunny release is in the offing.

This UK engineering share makes hydraulic and pneumatic systems that allow industrial companies to create, transfer, and control power. And demand for its goods is picking up as original equipment manufacturers (OEMs) restock and activity among resellers improves. Indeed, Flowtech’s first-quarter performance was so robust that it predicted it could end 2021 with a revenues run rate similar to pre-pandemic levels.

At current prices, Flowtech Fluidpower changes hands on a forward price-to-earnings (P/E) ratio of around 21 times. This sort of meaty rating — allied with the strong recent share price performance — poses an investment risk. If the company were to announce that its trading has started to level off, it could prompt a sharp share price reversal.

Logistics leviathan

I also think Urban Logistics REIT (LSE: SHED) could be a shrewd buy before it releases full-year results on 9 June. UK logistics and warehousing shares Clipper Logistics and Tritax Big Box REIT are already in my portfolio. I think rising e-commerce volumes will deliver strong and sustained shareholder returns. And I’m expecting Urban Logistics’s upcoming release to reiterate its exceptional structural opportunities.

I plan to hold those shares for a decade or more. Demand for distribution and storage assets continues to outstrip demand by a fair lick as Internet shopping activity rises. Consequently, rents are on a steady upward slant and the likes of Urban Logistics are expanding rapidly to exploit this market to the fullest. The company claimed at the time of its interim report in November that “the logistics market continues to break all records”.

The Covid-19 outbreak supercharged online shopping volumes as lockdowns shuttered physical stores all over the globe. A legion of new Internet users entered the fray and retailers invested vast sums to improve their online operations. It’s no wonder that Urban Logistics has said that “we expect that behavioural changes formed during lockdown are here to stay”. And logistics services providers like this stand to benefit significantly from this sea change in consumer habits.

Urban Logistics’s healthy appetite for acquisitions could create trouble later down the line. Property companies can overpay for assets, or an asset can fail to deliver on its promise for a variety of reasons. That said, I’d still add this UK share to my own shares portfolio right now.

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I reckon the outlook statement did the damage. The company explained that “Brexit-induced nervousness” has been affecting its markets leading to reduced sales activity. Looking ahead, the directors said in the report that there’s little chance of a return to organic growth while the political situation remains unresolved. And they expect the dampener on business activity to persist “well into 2020.”

Cost savings ahead to boost profits

However, the company doesn’t plan to allow a simple thing such as weaker revenue growth to affect the overall outcome with profits. The directors reckon they can “mitigate” the effect of reduced growth in revenue with cost-reduction measures. Furthermore, they expect cash conversion to continue to improve as working capital falls.

There’s been a comprehensive review of operational resources and productivity and now the management team is developing a plan to “harness the benefits of the many areas of potential improvements identified.” That sounds exciting, but when I read stuff like this in company reports, the cynic in me always wants to ask, “Why did they let things become so inefficient in the first place?”     

The firm is also turning its attention to the supply chain where it sees “major opportunities” to reduce costs, rationalise its range of products and to reduce inventory. Flowtech is clearly serious about this initiative and has created a new role of group commercial director to oversee its execution.

By identifying a way to optimise the medium-term IT strategy without the need to rip it all out and start again, the company has saved a lot of potential expense down the road. And by bearing down on its debt collection and inventory management procedures, the firm is boosting its cash flow performance and points to cash generation in this reporting period as evidence of improvements.

Dividend up

Overall, the half-year figures aren’t bad. Revenue rose 5.7% compared to the equivalent period last year, underlying operating profit moved 7% higher and earnings per share slipped back by almost 11%. But that all-important net cash figure from operations came in at just over £4.4m, which compares to an outflow of cash of around £2.3m last year. Meanwhile, the net debt figure rose to £18.8m up from £18m a year ago.

The directors signalled their confidence in the security of ongoing trading by pushing up the interim dividend by 5% — that doesn’t look like a company on its financial knees to me. Indeed, I’ve been keen on distributors as an investment for a long time because they ride the fortunes of an entire sector without getting bogged down in many of the problems that enterprises face when dealing with end-using customers.

With the share price close to 113p, the forward-looking earnings multiple for 2019 is just over seven and the anticipated dividend yield is 5.6%. I’m not expecting business to entirely fall of a cliff any time soon so see this stock and its valuation as attractive.

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Of course, a number of FTSE 100 stocks offer significantly higher yields than the index. One example is SSE (LSE: SSE), which has a 7%+ dividend yield. Could it therefore be worth buying alongside a dividend growth stock which released a positive update on Tuesday?

Improving prospects

The company in question is specialist technical fluid power products supplier Flowtech Fluidpower (LSE: FLO). It released a trading update which showed revenue increased by 54% in the first nine months of the year. Of this, 6.7% was organic, while the remainder was from acquisitions.

The company continues to have a positive outlook about future growth rates for the fluid power market. Its diverse range of customers in the UK and EU could provide it with a degree of resilience over the medium term.

In terms of its income prospects, Flowtech Fluidpower currently has a 3.7% dividend yield, which is covered 2.6 times by profit. This suggests that it could rise at a faster pace than profit, without hurting its financial standing. And with earnings due to rise by 9% next year, inflation-beating dividend growth could be on the cards. With the stock trading on a price-to-earnings growth (PEG) ratio of around 1.4, it seems to offer a wide margin of safety at the present time.

Low valuation

As well as a 7%+ dividend yield, SSE also seems to offer a low valuation. The company continues to face uncertainty from a variety of areas. For example, regulatory and political risk remains high, and could continue to weigh down investor sentiment. There are continued fears surrounding the prospect of nationalisation, and this may help to explain why the stock has a price-to-earnings (P/E) ratio of under 11 at the present time.

Additionally, a recent profit warning hurt investor sentiment, while the general optimism among investors (which remains in place despite the recent stock market correction) means that defensive shares are less popular.

SSE may not be as defensive as it once was, as a result of the risks it faces, but it could prove to be a worthwhile investment should market volatility continue.

With the threat of a global trade war and rising US interest rates, its inflation-beating dividend growth and high yield could offer relatively strong returns for investors over the medium term. And with plans to reshape the business through a split in the coming months, the long-term prospects for the company appear to be improving. As such, now could be the right time to buy.

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The sharp drop was triggered by a profit warning caused by contract delays and management guidance that “growth may be softening”.

Lost profit

Delays to a £1.5m contract for the Thames Tideway project mean that this revenue will now slip into 2019. Operating profit is now expected to be “marginally below market expectations” this year.

Another surprise is that long-serving chief executive Sean Fennon has decided to retire this year, and will “relinquish his executive duties … with immediate effect”. Mr Fennon will be succeeded by chief financial officer Bryce Brooks, so there should be no leadership vacuum. But I get the feeling that Mr Fennon’s departure may have been rushed slightly.

Growing pains?

Today’s half-year figures from Flowtech suggest to me that after a string of acquisitions, the group may be experiencing some growing pains.

Revenue rose by 65% to £56m as acquisitions added volume, but underlying operating profit only rose by 26% to £5.7m. This means that the group’s operating margin fell from 13.1% to 10.1% during the period.

Alongside this, net debt has risen by 114% to £18m over the last year, mostly due to acquisition spending. Another concern is that customers are taking an average of almost six months to pay their bills, leaving a lot of cash tied up in the business.

The company says it is putting its acquisition programme on hold to focus on developing its corporate infrastructure. This sounds sensible and may explain why Mr Fennon is being replaced by his top bean-counter — a traditional choice when financial improvements are required.

Flowtech shares look cheap after today’s fall, on about 7 times forecast earnings with a forecast yield of 5%. But I think there could be more bad news to come. I’d steer clear of this stock for now.

A rising star

The share price of FTSE 100 firm Ashtead Group (LSE: AHT) has doubled over the last two years. This equipment rental firm hires out gear to construction companies and industrial customers. It operates the A-Plant business in the UK, but 85% of revenue comes from the Sunbelt business in the USA.

Like Flowtech, Ashtead has been taking advantage of a fragmented market to make regular acquisitions and increase market share. The firm spent £145m on small acquisitions during the three months to 31 July. This helped to lift revenue by 22% to £1,047m and pre-tax profit by 23% to £274m.

Note how both revenue and profit rose by roughly the same amount. This shows that profit margins are holding up as the company expands. That’s something I like to see.

Is it too late to buy?

The group would be exposed in the event of a slowdown in the booming US market. But the company reported “strong end markets” during Q1 and said that full-year profits are now likely to be ahead of expectations.

Analysts’ are forecasting earnings of 165p per share for the current year. This puts the stock on a forecast P/E of 14, with a prospective yield of 1.6%. The yield is low due to cash flow being invested in growth. But debt is under control and this valuation doesn’t look excessive to me.

I believe Ashtead could still be worth buying if you want exposure to the US economy.

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Consolidating the market

In a drive to consolidate the “highly fragmented” hydraulic and pneumatic industry in the UK and Europe, Flowtech completed six acquisitions during 2017. Revenue surged 46% compared to the year before and underlying operating profit moved up 22%. The firm managed to extract an increase of 58% in cash from operations and used some of that to raise the total dividend for the year by 4.9%. Meanwhile, the latest figure for net debt is around £13.2m, which is around one-and-a-half times the level of annual underlying operating profit, so manageable for the time being.

Chairman Malcolm Diamond said the firm’s acquisition activity “strengthened our position with important pan-European and global branded suppliers, enhanced our technical strength, and reinforced our position in our current core geographies of UK, Ireland, and Benelux.” During the first quarter of 2018, the firm completed another acquisition, of Balu Ltd. However, the directors don’t plan any further acquisitions during 2018 and aim to concentrate on integrating the new businesses already added to “achieve synergistic benefit and capitalise on the entrepreneurial and technical skills of the new operations.”

Looking forward, we can expect both organic and acquisitive growth over “the short, medium and long term.”  And Flowtech Fluidpower continues to shape up well against popular quality, value and momentum indicators. I think the stock is more attractive than supermarket giant Tesco(LSE: TSCO), for example.

Turnaround, or long-term falling star?

When I look at Tesco today I see a falling star in a challenged industry. Others may see a turnaround candidate that is turning, and I can’t argue with the double-digit percentage earnings increases the firm has been posting lately, or with recent share-price progress. However, I think the valuation is ahead of itself.

Today’s share price around 237p throws up a forward price-to-earnings ratio of just over 14 for the trading year to February 2020 and the forward dividend yield is around 3%. But to me, what we are seeing with Tesco is an efficiency-driven rebound from a catastrophic earnings collapse and not a sustainable growth story emerging. I think the market should be much more cautious with Tesco’s valuation, perhaps setting the forward P/E at around seven and the forward yield near 6%.

Even then I’d be wary, because the threat from the rise of big-discounting competition, such as Aldi, Lidl and others, is relentless. The old way of doing business is dead and buried for Tesco and it will have to continue to adapt to survive. But will it thrive in the long term? I wouldn’t bet on that and see the most likely outcome as a managed decline of this once-mighty business. So, I’d avoid Tesco and buy shares in Flowtech Fluidpower instead.

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The business, which provides collateral management and regulatory reporting solutions, announced that revenues ducked 16.4% during the six months to September, to £12.7m, a result it put down to “a temporary fall in services revenues and some delays in contract signings.”

As a result, pre-tax losses at Lombard Risk ballooned to £5.9m, from £100,000 a year earlier.

Chief executive Alastair Brown called the results “unsurprisingly pretty sober.”

He said: “A number of opportunities we had hoped to secure in the period remain in the pipeline as market distractions such as MiFID II caused companies to delay on committing to new projects.

“This leaves us much to do in the second half, and converting our strong visible pipeline will be crucial to us meeting market forecasts,” he added.

A risk too far?

The City’s army of analysts had been expecting Lombard Risk to continue on its path of steady bottom-line improvement, flipping from losses of 0.18p per share in the year to March 2017, to earnings of 0.5p in the present period.

And earnings were predicted to continue tearing skywards beyond this year with the number crunchers touting a 152% earnings improvement — to 1.2p — in fiscal 2019.

Thanks to today’s whopping 31% share price slide, these current projections result in a forward P/E ratio of 14.7 times, below the widely-accepted benchmark of 15 times that signals decent value for money.

And some share pickers could argue that the scale of transformation over at Lombard Risk makes it worthy of consideration at these prices — indeed, Brown commented today: “during the period strong foundations have been put in place, with an improved salesforce, a new development centre in Birmingham, and a renewed effort to target new business as well as extant cross-selling opportunities.”

However, potential buyers should be on guard for meaty downgrades to earnings forecasts given the challenging trading conditions Lombard Risk is toiling in. I reckon risk-averse investors may want to sit on the sidelines for now.

Powering on

Flowtech Fluidpower (LSE: FLO) is another stock expected to deliver perky profits growth in the near-term and beyond, and I am much more happy to endorse its earnings outlook than Lombard Risk’s.

With demand for its hi-tech products continuing to swell — these shot 34% higher during January-September to £54.5m, Flowtech advised last week, or by 12.4% on an organic basis — it comes as no surprise that the company’s share price is following suit. It has just topped out at 179p per share, taking total gains since the turn of 2017 to 43%.

City experts anticipate much, much more to come, and are predicting a 35% earnings rise in 2017 to be followed with a 17% advance next year. And current estimates make Flowtech stunning value, too, with the firm rocking up on a prospective P/E multiple of 13 times, and a sub-1 PEG readout of 0.4.

I reckon those seeking great growth shares on a budget could do a lot worse than pile into the AIM star.

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However, I believe this impressive performance needs to be kept in context. The shares have only risen by 23% over the last five years (FTSE 100: +31%) and are worth 18% less than 10 years ago (FTSE 100: +16%).

These share price movements highlight the cyclical nature of the mining business. So it’s important to consider what stage of this cycle we’re currently at. Opinions vary, but my view is that we’re somewhere in the middle. I believe well-run companies with low-cost mines should be able to continue generating attractive returns for some time to come.

Strong performance

Tuesday’s third-quarter production figures from Rio Tinto seem to confirm this view. The group’s new automated rail system helped to increase iron ore shipments by 6%, compared to the same period last year. Bauxite production rose by 4%, while coking coal was 3% higher.

The only downbeat remarks related to copper production, where various delays mean that guidance for full-year copper output is between 460 and 480 thousand tonnes, down from 500 to 550 thousand tonnes.

Tempting shareholder returns

Rio Tinto has announced plans to return more than $8bn to shareholders so far this year. And recent press reports suggest to me that the group’s focus on selling non-core assets could result in further returns. Among the potential candidates for disposal are its remaining coal operations and part of its aluminium business.

The stock currently trades at 2.1 times book value, which isn’t obviously cheap. But the current £37 share price is equivalent to just 11 times trailing free cash flow. There’s also a well-covered forecast dividend yield of 5.4%. I’m holding on for more.

Sales up 34%

Another cyclical business performing strongly this year is small-cap Flowtech Fluidpower (LSE: FLO). This AIM-listed company specialises in supplying “technical fluid power products,” such as parts for hydraulic systems.

The group’s sales rose by 34% to £54.5m during the nine months to 30 September. Of this growth, 12.4% was organic, meaning that it came from existing businesses. The remainder came from acquisitions.

Flowtech’s shares have risen by 34% so far this year, compared to a gain of 22% for the AIM market as a whole. Tuesday’s update confirmed that management expects full-year results to be in line with expectations.

This suggests that earnings per share should climb 23% to 13.5p this year, putting the stock on a forecast P/E of 12.5. Dividend growth is expected to be about 5%, giving a prospective yield of 3.5%.

Still a buy?

In my view, this valuation still looks attractive, given the group’s solid fundamentals. Net gearing was just 12% at the end of June, and the dividend has been consistently covered by free cash flow since the firm’s flotation in 2014.

Strong sales growth and stable profit margins suggest the shares could have further to go. I continue to rate these shares as a buy.

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Highlights in today’s half-year report include revenue almost 25% higher than a year ago, underlying operating profit moving up 11% and a decline of just over 40% in the firm’s net debt figure on the balance sheet. The directors pushed up the interim dividend almost 5% in a sign of confidence in the outlook.

Acquisitive growth

Earnings per share declined by almost 12%, but I don’t think that’s anything to worry about. Last year, a deferred tax credit flattered the earnings result and this year the share count is a little higher because of a £10m capital raising event in March. The company wanted the money to move forward with its acquisition programme and reports five completed during 2017 so far and 11 since first listing on the stock market in 2014.

The directors reckon they are “confident” of completing more acquisition deals in the second half of the year, which is encouraging because the firm has become a consolidator in the fragmented fluid power sector. I reckon such a strategy could lead to a critical mass of business that leads to an irresistible offering for Flowtech’s customers, based on an efficient and lower-cost distribution service.

Organic progress

Acquisitive growth in the UK, Ireland and continental Europe is running alongside good organic progress, and City analysts following the firm expect earnings to advance 36% this year and 12% during 2018. Meanwhile, at today’s 134p share price, the forward price-to-earnings (P/E) ratio for 2018 sits just below nine and the forward dividend yield at almost 4.6%. Those forward earnings should cover the payout around two-and-a-half times. Assuming that Europe’s economies are not about to fall off a cliff, I think these indicators represent good value.

Over at Servelec Group (LSE: SERV), yesterday’s interim results report sent the shares into a bit of a tail spin and at 240p, the price is around 16% lower than it was at the end of last week. The UK-based technology firm provides software, hardware and services to the UK healthcare, local government, nuclear, power, utilities, oil and gas sectors, but as you might have guessed, there’s a problem.

Positive long-term outlook

Chief executive Alan Stubbs tells us in the report that a deferment in customer demand in its technologies division, and in the power and infrastructure segment of its controls division, will likely affect short-term progress. But he assures us that the health and social care division, and the oil and gas segment of the controls division, are performing well and he is positive about the longer-term prospects of the company.

Such short-term challenges in an otherwise decent long-term story can spell opportunity for us investors and the first-half numbers show us the firm’s potential when things are going well. Compared to a year ago, revenue lifted 11%, adjusted diluted earnings per share rose 45%, and the firm’s net debt figure declined by a healthy-looking 54%. The directors indicated their ongoing confidence in the bigger-picture outlook by pushing up the dividend by 21%. I think Servelec is interesting right now and one to keep a close eye on.

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The company’s share price descent cannot be described as catastrophic. But I expect its value to continue dropping in the weeks and months ahead.

In its spring update Fidessa announced that while it “continues to see structural and regulatory drivers within the market, the increasing number of European elections, the forthcoming Brexit negotiations and the establishment of the new US administration are clearly creating some uncertainty.”

This environment had seen a number of its customers delay decisions during the first quarter, Fidessa advised. And given that the political malaise on both sides of the Atlantic is intensifying, I reckon its next financial update (half-year numbers are scheduled for July 31) could prompt another sharp fall.

Projections in peril?

In this tricky environment the City expects the Woking business to endure a 1% earnings slip in 2017, although clearly this estimate is in danger of being downgraded should market conditions indeed remain difficult. And this scenario puts Fidessa’s perky dividend projections in serious jeopardy, in my opinion.

The trading, investment and information services provider is expected to pay a total dividend of 92.1p per share this year, creating a market-beating yield of 3.9%. However, this projection is barely covered by predicted earnings of 92.8p.

And the situation does not improve much for next year, either. A projected 10% earnings improvement, to 101.6p, also barely covers an anticipated dividend of 95.8p (which creates a 4% yield).

I believe those seeking chunky dividends in the near term and beyond can find much safer picks elsewhere, and certainly ones which carry much better value — Fidessa currently boasts a forward P/E ratio of 25.7 times, sailing above the broadly-considered value watermark of 15 times.

Pumping powerhouse

I am far more optimistic over the investment outlook over at Flowtech Fluidpower (LSE: FLO), particularly after this month’s latest trading update.

The builder of hydraulic, pneumatic and industrial instruments saw revenues detonate 24.7% in January-June, it advised. Flowtech continues to enjoy rampant demand across its businesses, with solid organic growth supplemented by the positive impact of recent acquisitions. And the likelihood of further M&A action should keep revenues on an upward tilt. The firm snapped up OCL, a specialist in the movement and storage of fuels, liquids and gases, earlier in July.

So it comes as little surprise that the Square Mile expects earnings to keep sparking higher.

A 29% bottom-line rise is predicted for 2017, a forecast that is expected to push the dividend from 5.51p per share last year to 5.8p. Not only does this create a handsome 4.3% yield, but also leaves the anticipated reward well covered — indeed, coverage of 2.3 times sails above the safety benchmark of two times.

And the good times are predicted to roll into 2018, an estimated 5% earnings rise is expected to drive the dividend to 6.1p. The yield for next year subsequently stands at 4.5% and dividend cover is retained at 2.3 times.

With Flowtech also dealing on a multiple of 10.3 times forward earnings, I reckon value-hungry investors need to give the Skelmersdale business a close look.

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