Strix Group Analyst Q&A “share price performance reflects how well the business has coped” (LON:KETL)

Strix Group

Strix Group plc (LON:KETL) is the topic of conversation when Zeus Capital’s Research Director Andy Hanson caught up with DirectorsTalk for an exclusive interview.

Q1: Andy, how has Strix Group performed this year in the face of COVID?

A1: I’d look at that in two parts; I would look at in terms of the share price performance and also the operational performance.

The share price performance has really been quite outstanding and the shares are up 20% year to date against the market which is down 20% so a 40% outperformance against the index is very impressive. I I think there are good, good reasons for that and that feeds through into the operational performance.

What we saw in February/early-March when the lockdowns began across Europe, as many companies, with true guidance from the market and also with true dividend expectations so just took a dividend holiday or cancelled them.

The company did neither of those thing so it maintained guidance within the market, although guidance has come back a little bit and it also firmly committed to paying not only the interim dividend for FY20 but also the dividend for FY19, which paid earlier in the year.

As I said, forecast did come back a little bit but it needs to be put in the context that profitability for FY20 is marginally ahead of where we were last year and I don’t think there are many businesses that can say that.

So, I think the share price performance just reflects how well the business has coped.

Q2: The company has just had a capital markets day, what did it cover?

A2: It was an interesting time to do one of these capital markets days and speak to institutional investors because of the time period we’re in, we just have the UK going into another lockdown as of tonight.

I think the fact that they held the capital markets day, it shows you the confidence that management team have in the business currently and the capital markets day really outlined the growth strategy for the business over the next five years.

It basically insinuated that revenue will double over the next five years so my forecast for this year of about £96 million of revenue, and they’re saying they can get to almost £200 million of revenue by 2025. There’s a similar uplifting in gross profits so gross profit will grow at about 70% across the five years and this is based on growth in the two smaller divisions, the water division, and the appliances division. They’ve made a couple of acquisitions over the last couple of years in those areas and that’s given them the scale to really go out and win market share in those markets.

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So, it really changed the dynamic of the way the market should think about the company so it’s gone from being a very low top line growth business of 2%-3% and seeing growth in profitability of 5-6%, to potentially a double digit top line growth and double digit profit growth. So, you could see 12%/13%/14% annual top line growth and 10% profit growth if they execute along the strategy that they’ve set out.

Q3: As you say, they’ve got growth aspirations set out, did they actually change anything?

A3: I think it is quite a big shift in the perception of the business, it came to market as a high quality, high margin business with a global market share in its component market of kettle controls but that’s quite low growth in a relatively small market. So, they control over 50% of the market by value, you would argue that it’s going to be hard for them to sort of get 60% or 70% of the market, therefore they’re constrained by how fast the market grows.

Whilst volume growth every year is about 6% or 7%, price erosion in kettle controls is 3% so you get this sort of 2% or 3% or 4% growth by value each year whereas what they said yesterday is that they can materially change how fast the business grows and also diversify away from that sort of lower growth but good control business.

Q4: Does this additional growth warrant a rerating then?

A4: Well, Strix Group shares have rerated this year, just on the back of their performance, the fact that they can maintain profitability and the dividend has seen the shares we rate to sort of 16/17/18 times from the range it was trading in in prior to this year, sort of 10 – 14 times.

I would argue that if they’re successful in executing this strategy then they probably will be one of the better businesses in the industrials market, within the UK and that could seeing the shares rerate further and have a sort of ‘through the cycle PE’ of 20 times.

Potentially, if they execute as, as I hope they do, we should see not only quicker earnings growth but also the benefit from a good rerating in the PE multiple.

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