Isle of Man-based Strix (KETL:160p), a global leader in the manufacture and design of kettle safety controls, has reported a solid set of results that vindicate my decision to buy-in at the 135p level ahead of the release (‘Strix ready to simmer again’, 24 December 2018). Longer-term shareholders who followed my advice to buy in at the time of the IPO have done well too as the shares have produced a total return of 27 per cent in little over 18 months on the opening 130p level (‘Tap into a hot IPO', 7 August 2017).
Globally, 196m sets of safety kettle controls were produced in 2018, representing 7 per cent annual market growth, of which Strix controlled a steady 38 per cent share by volume. It has an unblemished safety record – the company has never had a single product recalled due to a fault with its controls – and takes an active role by engaging with regulators to improve regulation levels and enforcement of patent infringement. Market growth helped drive a 6 per cent rise in Strix’s adjusted operating profit to £31m and on a margin of 33 per cent.
In regulated western markets, the company has a solid market share of 61 per cent and a high penetration rate of between 77 and 117 per cent, respectively, in the more mature markets of Germany, Australia and UK. There is a real opportunity to capitalise on the vast North American segment (volumes increased by more than 10 per cent in 2018) which still only has a penetration rate of 13 per cent.
Product specification and pricing is adapted for each market segment which is why Strix offers a lower-cost offering to the less regulated markets (representing half the global market) – where it has a 20 per cent market share – to increase its presence in key countries including South Africa, Africa, India and across Asia. The same is true in China (representing 23 per cent of the global market and where Strix has a 46 per cent market share).
Strix is also improving efficiency of production, and safe guarding future output, too. Chief executive Mark Bartlett and finance director Raudres Wong told me during our results call this morning that the current £600,000-a-year rental on the lease on its facilities in China would have doubled when it expires in August 2021. So, Strix has decided to acquire a neighbouring site, with 50-year land rights, to develop a plant which is 2.5 times larger in size. The £20m capital expenditure will be fully funded from internal cash flows, and a modest amount of debt tapped from its £53m revolving debt facility that is keenly priced at 1.75 per cent above LIBOR.
Strix can certainly afford to make the investment, because the company generated net free cash flow of £26.1m from operating cash flow of £35m in 2018, which enabled it to declare a 7p-a-share dividend (at a cost of £13.3m) in line with the IPO, and one that is covered two times over by adjusted EPS of 14.9p. Net debt fell by 40 per cent to £27.5m in 2018, a better result than I had predicted when the company listed its shares.
The other part of the company is a water filtration business, Aqua Optima, which accounts for 10 per cent of Strix’s annual revenues of £93.8m. The division increased sales by a quarter to £9.3m last year. Products sold include water filter jugs and the Tommee Tippee baby formula appliance that sterilises and prepares a bottle of the correct volume and temperature in under two minutes. Strix sees an opportunity to replicate its success overseas in key markets, China and USA, both for existing and new products. Bearing this in mind, earlier this month it acquired certain assets, a development centre in Seattle and a well-regarded R&D team, from Aim-traded Halosource. Importantly, this has given it a foot into the US market.
Analysts expect underlying EPS to be flat at 15p this year mainly because of costs expensed in scaling up the water filtration business, but with cash generation strong this isn’t going to hold back the dividend. Mr Bartlett is comfortable with guidance that suggests a 10 per cent increase in the payout to 7.7p a share. Analysts at house broker Zeus Capital expect EPS of 16.2p in 2020, which augurs well for another dividend hike next year. He also notes reassuringly that Brexit will have no direct impact on the business given the company’s global business footprint, and a neutral currency matrix.
Trading on a 2020 forward PE ratio of 10, and offering a prospective dividend of 4.8 per cent, I continue to rate Strix’s shares a buy and have a 200p target price. Buy.
■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed onwww.ypdbooks.com.
