The global economy may be slowing, and geo-political risks have certainly escalated this year, but this is not holding back Isle of Man-based Strix (KETL:167.2p), a global leader in the manufacture and design of kettle safety controls and one with strong relationships with global original equipment manufacturers (OEMs).
It’s hardly surprising given that kettles are replaced on average every three and a half years which secures around 90 per cent of the company’s annual revenue, an income stream that is heavily patent protected and enforced vigorously through intellectual property actions. Strix’s heating controls are installed in 35 per cent of the 196m new appliances that are manufactured globally each year.
Strix maintained its 61 per cent market share in regulated markets during a six-month period when kettle control volumes held firm and North America was the stand out performer. Given the seasonal second half weighting to the numbers, and after taking into account commercial contracts already in place and sales opportunities for newer product lines, management guidance points towards 3 per cent volume growth for the group for the full year. China remains the largest single country kettle market with consumers buying 50m units each year of which Strix has a 46 per cent market share and is investing in a larger production facility. That market share is likely to rise, too, following intellectual property actions, and a focus on key brands.
During our results call this morning, chief executive Mike Bartlett made the important point that the ‘flow of goods’ is principally between Isle of Man and China which explains why Strix has not been impacted by the ongoing US/China trade war. Brexit will have a minimal impact on the company, too. Commodity prices for key materials have been secured through to the middle of 2020 and even if sterling weakens further then operational activities have a natural hedge, so currency weakness would actually be a “slight positive”.
Analysts at house broker Zeus Capital expect Strix to maintain its leading industry leading margins (operating profit margins in excess of 30 per cent) and high conversion rate of cash profit to operating cash flow in the middle of the historic 80 to 90 per cent range. This robust cash flow generation is supportive of a further 10 per cent hike in the annual dividend per share to 7.7p and one that is also covered almost two times by stable full-year earnings per share of 15p.
On this basis, the shares are priced on a prospective price/earnings (PE) ratio of 11 and offer a 4.6 per cent forward dividend yield, a rating that fails to take into account Strix’s strong organic growth prospects in the years ahead, nor its defensive qualities when economic conditions are less benign. Indeed, the global kettle market is currently worth £3bn at retail prices, and projected to expand by 15 per cent over the next three years. Strix aims to raise its market share to 40 per cent by 2021, mainly by raising market share in less regulated markets from 20 to 28 per cent, and lifting its share in China to 50 per cent. It’s well placed to do so.
Having first suggested buying the shares, at 100p, in my pre-IPO analysis (‘Tap into a hot IPO', 7 Aug 2017), and last advised buying them, at 174p (‘Strix to sizzle to new highs after stock overhang clears’, 30 July 2019), I maintain my conservative looking 200p target price. Buy.
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