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Strix Group “H2 should see solid revenue growth YoY” says Zeus Capital

Strix Group plc (LON:KETL) first half performance has been impacted by the supply issues in China in Q1 and the lockdown in Europe and North America during Q2. Despite this, it expects to post profitability in FY20 in line with the previous year (ZC Adj FY19 PAT £28.4m). The good performance is due to the resilience of the business model, cost cutting in response to global economic headwinds and the on-going recovery as lockdown eases in Regulated markets. Unlike the majority of mid/small cap companies, Strix maintained guidance throughout the COVID-19 pandemic with previous forecasts published in mid-March, prior to the lockdown in many of Strix’s Regulated end markets. That management is able to guide to flat profitability yoy ahead of the important Q4 trading period is testament to the resilience the of business. The balance sheet remains conservative, with c. 1.0x net debt, and strong cash generation, aligned with the resilience of the business, means the dividend will continue to be paid without interruption. Valuation on updated forecasts is 13.4x current year earnings with a yield of over 4.0%.    

  • Clarity on performance in the first half highlights the resilience of the business: Today’s H1 trading update provides detail as to the quantum of the impact from COVID-19 with revenue declining 21% yoy. In revenue terms the Water category saw very positive 6% growth. In Controls, Chinese volumes were down just 9% after being down 27% in Q1 with the recovery continuing to gain pace. Exports lagged China and saw volumes decline 15% in H1. Importantly, trading has started to improve as lockdown restrictions ease. June saw an improved performance with the strength of the recovery picking up pace during July leaving a good order book for the remainder of the month and into August. With the new product release schedule on track for H2 and pent up demand post lockdown, H2 should see solid revenue growth yoy.    
  • Profit flat yoy despite the impact of COVID in H1: Previous ZC forecasts were published at the time of the FY19 results in March, pre lockdown being fully implemented across Europe and North America. Following today’s statement estimates are updated to reflect the performance in H1 on FY20 results. Revenue forecast declines 10.9% to £90.4m but the efficiency and cost saving measures implanted mean profit forecast declines by just c. 3.5% with underlying profitability flat yoy.
  • Cash generation, net debt and the dividend: c. £4.0m of capex is being moved into FY21 meaning net debt will fall in FY20, remaining c.1.0x EBITDA, with the factory build nearing completion. ZC dividend expectations are brought into line with the new estimates in terms of profit growth, assuming another 7.7p in FY20.   
  • Valuation: Strix Group currently trades on c. 13.4x earnings and yields c.4.0 % for a business that has maintained guidance and its dividend.

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