Strix Group PLC Q&A with Zeus Capital’s John Wilson (LON:KETL)


Strix Group PLC (LON:KETL) is the topic of conversation when Zeus Capital’s Analyst John Wilson caught up with DirectorsTalk for an exclusive interview


Q1: Now, Strix announced its maiden set of results this morning, can you give us a recap of those results?

A1: So, these are the first set of numbers that the company has reported to the market following on from their successful IPO which was last August, just as a background, they raised £190 million at £1.00. Strix is the world-leader in kettle controls, it’s got around 38% market share by volume or around 50% by value.

In terms of 2017 results, overall numbers were broadly in line with our expectations, revenue was up about 2.9% to £91.3 million versus our expectations of £92.6 million, this represented a growth of about 2.9%. Within that, we actually saw a positive mix effect in terms of margin contribution, this is because the regulated market outperformed our expectations so in fact, we saw gross profit margin grow 120 basis point to 40.7%, this was about 90 basis points ahead of what we were expecting. So, as a result of this, we saw gross profit come in at £37.2 million, marginally ahead of our expectations at £36.9 million and in terms of the P&L, this had a positive flow through the rest of the P&L, so we saw bottom line earnings about 1% ahead of our expectations.

One other thing I’d note is that net debt came in at £45.9 million, this is lower than what we expected, we were expecting £48 million and this was down from £58.5 million at the time of IPO so we’d already reduced our net debt expectations by £10.5 million so very good cash generation through the year.


Q2: Can you talk a bit more about Strix’s markets and what trends they’re seeing there?

A2: As you said, positive year, Strix performed generally in line with the wider market and importantly it maintained its leading global market share which is about 38% by volume and 50% by value. Just to break that down, they operate across three markets which we classify in terms of regulated, less regulated and then the Chinese market.

In the regulated markets, overall volume growth was about 5% to 50 million appliances, they saw about 6% growth in the year and they maintain market share at about 61% so a very good performance in that, again, contributed to the nice uplift in gross margin. The 5% growth in regulated markets was against a backdrop of a 5-year compound growth of about 1% so very strong year and this was driven particularly by Western Europe and the Australian/New Zealand market which both grew at about 9%. Just following on from that, in North America, Strix gained about a 12% market share, over the last 2 years they hold about 75% of the North American market. In North America, overall household penetration, that’s basically kettles per household, is about 13% versus 120% in the UK so there’s plenty of scope for growth in North America.

In terms of the less regulated markets, growth during the year was estimated at 12% to 88 million appliances, this compares to a historic growth of about 8% so again, strong growth, demand continues to be driven by rising living standards in the area and demand for western-style goods. Strix saw a 16% growth in the less regulated markets and this was boosted by the U9 product which they launched during the year and they saw strong performance in South America and the all-Russian states, overall, they saw an increase in their market share of about 19%.

The third market which they’re in is China, the Chinese market is estimated to have declined 6% in 2017 to about 44 million appliances, however this is versus exceptional growth of 11.5% in 2016 so averaging that out, it’s growing about 5/6%. Importantly, they maintained their market share of about 50% so any risk that the competitors could’ve become more aggressive to win back market share because they gained a big market share in 2016, this hasn’t really played out. So, it underpins our view that structural changes in the market will benefit the company and support its market-leading position.


Q3: What about current trading and the outlook for 2018?

A3: The business saw strong trading during H2 and encouragingly, they’re saying this has continued into the first few months of 2018.

The one key thing that we think is quite interesting is that the Chinese market has been much more buoyant in the first few months of 2018 so they’re saying all three segments continuing to grow so it’s going quite well, it’s worth caveating that the Q1 is seasonally for Strix because of the Chinese New Year.

One other thing just to note is there’s growth in what’s called the electronic multi-cooker appliances in China and this offers a real opportunity for Strix to bring some new products into the market throughout the year. It’s a market where they only have about 10% share at the minute so they’re pretty confident about growing that part of the business.

In terms of numbers for FY18, we’re forecasting a 5.3% top line growth to £96.1 million which is generally in line with what the market grew last year, EBITDA of £36.7 million, adjusted profit after tax of about 23.6 million.


Q4: Finally, what can you tell me about the current valuation for Strix Group?

A4: In terms of PE multiples to December 2018, the business is trading on 11.2 times, falling to 10.4 in 2019, we apply a 19% tax rate to the business when in reality it’s much lower than that, between 3-4% so around 9.4 and 8.7 times if you apply that actual tax rate. On an EV/EBITDA basis, they are trading on about 7.6 times, falling to 6.9 and paying a perspective yield of 5.4% this year.

So, all in all, given that it’s a global leader with a 38% market share in a growing market, we think that’s pretty good value.

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