Energy supply and micro combined heat and power (mCHP) boiler designer Flowgroup (FLOW:AIM) has collapsed today thanks to a European Court of Justice (ECJ) ruling over VAT. To quickly recap, the ECJ has decided that it is not legal to charge VAT at 5% on energy-saving products in the UK, implying that the consumers should have to cough up the full rate of VAT, currently charged at 20%. This sparked a massive shares sell-off that crushed the price today, the stock collapsing by around 50% in early trading, before staging a modest recovery – they've down 35% at 15.5p.

Flow boiler

If this proves the case it will effectively add around 15% to the cost of the company's inhouse-designed mCHP boiler units, making it a harder sell to consumers. It also would mean that Flowgroup will not be able to legally make its sales pitch claim that a Flow Boiler effectively pays for itself. The company response is to accelerate a planned cost cutting programme to the point where it can re-launch the ‘Boiler that pays for itself’ campaign towards the end of this year.

The danger is that its manufacturing partner Jabil will have to financially streamline its own production process, and if it can't, or won't, presumably bang goes a vital commercial relationship. That said, it's our understanding that Jabil remains fully supportive despite this undoubted blow to Flow.


Analysts at broker Arden Partners have taken the axe to forecast, as detailed below, while number crunchers at Cantor Fitzgerald have pulled their assumptions, and recommendation, completely, for now.

Arden forecast changes

Dec 2015

Sales: £45m from £105m, PBT: -£20m from -£11.0m, EPS_ -6.9p from -3.8p

Dec 2016

Sales: £150m from £210m, PBT: -£10m from -£6.4m, EPS: -3.2p from -2.0p

But this is not over. There has been no official response to this from the UK government so far and it is not out of the question that some crafty jiggery pokery with energy product classifications, or some other political repositioning, could save the status quo. But even if not, Flowgroup has overcome technical problems before and should do so again now. And that could mean that today's battered share price could look a screaming bargain in the months ahead.

Flow Boiler

Issue Date: 16 Jun 2015