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Strix Group Plc Positive trading update, new factory progressing to schedule

We note the announcement this morning by Strix Group Plc (LON:KETL), confirming it continues to trade in line with market expectations, as previously announced at the time of the FY18 results (21st March 2019). It has also confirmed that the group has signed an agreement with the Zengcheng Government regarding a land purchase and construction of the group’s new factory is scheduled to start at the end of Q3 this year, this is in line with expectations. The impact of this new factory is already built into forecasts and its effect was discussed in a ZC note published on the same day as the FY18 results. Despite c. £25.0m of investment over the next two years, net debt will remain c. 1.0x EBITDA. Dividend growth of 10% to 7.7p in FY19 yields 4.8% with the shares trading on 10.6x earnings in FY20.

Current trading in line with expectations: The group has confirmed it continues to trade in line with market expectations. This is reassuring as it is two months post the last trading update provided in the FY18 results announcements. We expect the North American markets to continue to drive growth in Regulated markets during FY19 and the positive market share gains during FY18 in Less Regulated markets provide confidence that Strix’s strategy is working. Since coming to market the Company has met consensus earnings expectations and outperformed in terms of margin performance. A continuation of this trend in the current year could lead to a re-rating. Forecasts assume 8.2% growth in revenue in 2019E to £101.5m, benefitting from the HaloSource acquisition, with adj. EBITDA of £36.5m. The impact of the new factory investment was incorporated at the time of the 2018FY results, with an implied net debt at year end of £31.7m, c1.0x EBITDA.

New manufacturing facility: The group originally signed a contract to purchase a new site in Zeng Cheng in February. The announcement this morning confirms that the signing of the land purchase agreement with the Zengcheng Government and allows the group to move forward with construction, expected to begin in Q3 this year. The expected c. £20.0m capital cost of the project is factored into forecasts as are other costs associated with the move including additional working capital investment. Project costs will be entirely funded by existing borrowing facilities and free cash, despite this net debt to EBITDA will remain c. 1.0x.

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