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Strix ready to simmer again

The kettle safety controls specialist is rated on a single-digit PE ratio and offers a 5 per cent-plus dividend yield, a rating completely out of sync with a company that has a dominant position in a growing market
December 24, 2018

This is an opportune time to revisit the investment case of Isle of Man-based Strix (KETL:136p), a global leader in the manufacture and design of kettle safety controls, ahead of a pre-close trading update in late January. It’s a company I have followed for some time, having initiated coverage ahead of the IPO in 2017 (‘Tap into a hot IPO', 7 Aug 2017), albeit the shares popped 30 per cent above the 100p share price on listing.

Still, the share price had simmered up nicely to hit my 165p target when I last reviewed the company (‘Strix investment case hots up’, 16 July 2018). True, it has come off the boil in the autumn equity market sell-off, but this is in no way a reflection of the operational progress being made. In fact, I anticipate that the forthcoming full-year pre-close trading update in late January will confirm that the company has achieved market expectations. These point to Strix delivering 5 per cent revenue growth over the course of 2018 to boost both adjusted pre-tax profits and earnings per share (EPS) by 8 per cent to £29.1m and 14.8p, respectively, as joint house broker Zeus Capital predicts. Reassuringly, the board of directors viewed trading prospects for the rest of the year “with optimism” at the time of the half-year results in mid-September 2018, and rightly so.

That’s because Strix’s global market share is holding steady at around 38 per cent of the 182m or so safety controls produced each year in a market that is growing by 6 per cent a year. The company’s dominant market position and pricing power – gross margins actually rose from 37.2 to 37.9 per cent in the first half of 2018 – are a reflection of the patent protection surrounding its products, which creates significant barriers to entry for rivals, and a moat around its business. These patents are being strongly enforced, too. Indeed, in an update just before Christmas, the company highlighted how it has successfully taken legal action against parties that have infringed its patents. In one case, a Chinese manufacturer that had incorporated Strix’s patented controls into heating appliances for export to South Korea has ceased distributing infringing appliances and is actually now a direct customer of Strix. In another case, two German distributors have paid Strix an undisclosed sum in damages for infringing its patents.

The ongoing growth also reflects the fact that Strix has relationships with more than 400 brands and retailers around the world, including multinationals Siemens, Philips, Walmart, Supor and Tesco. Around two-thirds of its top 30 clients have traded with Strix for more than a decade, illustrating the high standing it has in the industry and value chain, which in turns supports its market-leading position and acts as a strong barrier to entry for rivals.

I also like the impressive cash generation of the business, which should result in closing net debt declining by a third to £31m in the 12-month trading period, while at the same time providing the board with surplus free cash flow to declare a 7p-a-share annual dividend. Moreover, as both borrowings and the interest expense are reduced then this frees up more cash flow to recycle back to shareholders. This explains why analysts predict a 10 per cent hike in the dividend to 7.7p in 2019. On this basis, the shares are not only rated on a modest price/earnings (PE) ratio of 9 for the 2018 financial year, but offer a prospective dividend yield of 5.1 per cent, rising to 5.6p per cent in 2019.

In my book, the pullback in the share price has created a decent repeat buying opportunity, and one that I suggest is worth exploiting ahead of the company’s pre-close trading update in late January. Buy.

 

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