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Flowgroup – shares crash on announced “potential alternative” to proposed Flow Energy business disposal

By Steve Moore | Thursday 11 May 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Writing previously in March on Flowgroup (FLOW), with the shares then at 5p, I concluded that there looked to remain both funding and jam-tomorrow uncertainty and to continue to avoid. Presently, the shares are approaching 40% lower on the day, at sub 2p, on the back of news that the company “is in the advanced stages of preparing a significant capital fundraising as a potential alternative to the proposed disposal of the Flow Energy business”.

This follows it having announced in February “a number of approaches expressing interest in its Flow Energy business” - the terms of which, potentially providing sufficient funding for the microCHP business through to commercialisation in Europe, saw it “concluded that the disposal of Flow Energy is something that it should actively pursue”. It then updated in March that following “a number of indicative offers… has selected a preferred bidder and has entered into an exclusivity agreement with this party”. Sounded promising, but now;

“Whilst discussions with the preferred bidder for the Flow Energy business continue… also in advanced discussions with Flowgroup's manufacturing partner to downsize and reduce its exposure to its microCHP business. In addition, the company is in advanced discussions concerning a capital injection into the group of in excess of £20 million, which would be necessary should the proposed disposal of the Flow Energy business not take place.”

Whoa! £20 million compares to a market cap even at 3p per share of £9.5 million. To get that away must mean mega discount ahoy!... It would;

“Should any such fundraising take place, it is likely that the investment will be made in the form of convertible securities and new equity and it is expected that the equity issue and convertible security conversion prices will be at 1.5p and 1.8p respectively. The directors intend that a material element of any such fundraising will be made available to existing shareholders of the company on a pre-emptive basis.”

Hmmm. This compares to the February announcement also having included “if the disposal of Flow Energy does not take place in the coming months, the directors will consider a number of funding options for the group, including selling a strategic stake in either its Flow Energy or microCHP businesses or through a placing”.

So are the businesses now that unattractive that a massively discounted fundraising is the only real option in town? I also note “reduce its exposure to its microCHP business” compares to a previous “the company continues to work with Jabil… to optimise the production of its microCHP boiler, which is focused on a full entry into the European market”. I retain my bearish view.

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