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Strix Group Analyst Q&A with Zeus Capital (LON:KETL)

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

Q1: Strix provided interim results for the six months to the 30th June, what can you tell us about the key takeaways?

A1: It was a really interesting set of results, really because of what’s happening to the average selling price. So, in the company’s core kettle component business, they were generally saying they see price erosion of between 3-5% annually, interestingly in the first half of the year, average selling prices were up and they’re now forecasting for average selling price for the full year to be broadly flat.

So, I think what you’re seeing here is structural growth coming through in high margin territory such as North America and the statement alludes that North American is still fast growing. Because of that, align to the increase in prices that they put through to the end of next year, you’ll see profit come through more strongly than we probably expected. This means they’re not having to aggressively go out and win volumes so volumes were broadly fat year-on-year but profitability was ahead.

So, the company is in a really strong position at a time where global markets have slowed down and they’re still growing but they have slowed down to about 2%, within that the high margin regulated markets are still growing quite strongly at about 3% which his a little bit stronger than we would’ve expected.

I’m really encouraged with the results they’ve put out for the half year and I’m very very comfortable with my profit forecast for the full year.

Q2: Talking about forecasts, how would you describe the outlook for the company?

A2: It’s an interesting one. When you look at the global market and what’s happening, the Chinese market has slowed down in the first half of the year but looking forward, Strix have been very very confident in the outlook because of contracts they’ve already won and new products that they’ve bought which is taking market share.

So, they think volumes will be much stronger in the second half of the year and they’re saying that volumes will be up about 3% considering they were broadly flat at the half year. It shows you the strength of the volumes that will come through in the second half of the year, predominantly in China but they’re also growing strongly in regulated markets, as I say, and also less regulation markets.

That, again, gives us great confidence in the profit outlook, I’m very reassured about the outlook for this year.

Q3: Finally, what are your thoughts on the Strix Group valuation?

A3: Looking at this year’s PE multiple, it’s trading on about 12 times but within this year’s numbers, there’s a £2 million impact from an acquisition they did earlier in the year, a company called HaloSource,  they were assuming this year it would impact profitability by £2 million and rightly, it would be break even next year.

So, you really have to look through to next year to get a real valuation on it, the PE next year is about 11 times, 9 times EV/EBITDA and the dividend yield is still 4.5/5% so good yield.

I still think the valuation metrics look attractive in relation to what’s going on in the business.