Isle of Man-based Strix (KETL:233p), a global manufacturer and designer of kettle safety controls, had already flagged up first half results in a pre-close trading update (‘Targeting value plays’, 3 August 2020).
More important than the Covid-19 related 9 per cent reduction in output, and 21 per cent slide in net revenue to £34.7m, is how the business is now bouncing back. A strong summer order book has been maintained through September, and the company is now guiding shareholders to expect record quarterly revenue of £24.1m from its kettle controls business, up 26 per cent year-on-year. In the first half, the segment posted revenue of £30m.
It’s not the only part of the business performing strongly as the water category, which includes the Aqua Optima brand, is on course to grow third quarter sales by 28 per cent to £3m. Of the 14 products slated for launch by the year-end, chief executive Mark Bartlett picks out the Aurora beverage station (under the Aqua Optima brand) as the most exciting. It should be a decent profit earner, too.
So, although full-year revenue will still decline from £96.9m to £90.4m, pre-tax profit should hold steady at £30m after taking account of cost savings implemented during the lockdown, says Andy Hanson at house broker Zeus Capital. On this basis, expect earnings per share (EPS) of 14.3p. Chief executive Mark Bartlett reiterated the board’s commitment to a maintained dividend of 7.7p a share during our results call.
Importantly, Strix offers prospects of earnings growth in 2021, having announced alongside the results the earnings accretive complementary acquisition of Vicenza-based LAICA. The Italian company focuses on water purification (water jug filters, water dispensers, bottle and coffee machine filters) and the sale of small household appliances for personal health and wellness. The deal is sensibly priced as the initial consideration of €19.6m (including €8m worth of shares) equates to 6.7 times LAICA’s 2019 cash profits. A maximum cash earn-out of €12m is subject to LAICA hitting profit targets for 2021 and 2022, thus incentivising the vendors. Strix’s management have identified cost savings from optimising manufacturing facilities and utilising their research & development capabilities, so adding a further driver of profit growth. They also note cross-selling and up-selling opportunities across the extended client base, and scope to boost Laica’s global footprint.
The acquisition will complete close to the year-end, so will have minimal impact on the 2020 results. However, after factoring in Laica’s contribution to 2021 numbers, Zeus Capital expects revenue of £112m (20 per cent upgrade) and almost 10 per cent growth in pre-tax profit to £32.9m to deliver EPS of 15.2p.
The shares have produce a 150 per cent total return since I highlighted them (‘Tap into a hot IPO', 7 August 2017), and I feel there is scope for Strix’s 2021 PE ratio of 15 to expand as its dominant market share, hefty profit margins on patent protected products, and defensive qualities become even more attractive to investors. A 2021 prospective dividend yield of 3.6 per cent is worth locking into, too. Buy.
Mission on course for profitable recovery
As previously flagged UK advertising and marketing specialist The Mission Group (TMG: 58p) reported a first half pre-tax loss of £2.3m on operating income down a quarter to £29m (‘Small caps under the radar’, 27 July 2020). Of far more relevance is management’s reiterated guidance that the business is on course to return to profitability in the second half. Analysts at Edison are pencilling in annual pre-tax profit of £0.5m on revenue of £62.7m, implying second half profit of £2.8m. The group continues to win new accounts, too.
That’s because Mission has significant exposure to the healthcare and technology sectors, both of which are proving resilient through the Covid-19 pandemic. For instance, specialist healthcare agency RJW posted 20 per cent revenue growth in the first half, and specialist technology agency April Six has won accounts with the European Space Agency, amongst others. Mission has also been winning work in the chemical sector, having landed a major contract in the Far East with INEOS and another in China with Croda, both of which will be delivered in the second half.
Of course, these wins are not enough to offset all the revenue shortfall from agencies at the coal face of the pandemic: property (ThinkBDW), events (Bray Leino) and sales promotions (Mongoose) being hit hardest. So, Mission has taken the requisite action to cut the cost base, saving £700,000 a year alone by slimming down its London office property portfolio. Importantly, this will not impact service levels to its long-standing blue-chip client base.
The effect of the cost cutting means that profits will bounce back faster during the economic recovery stage, hence why analysts at both Edison and house broker Shore Capital believe that pre-tax profit of about £9m can be made on revenue of £76m to £77m in 2021. On this basis, expect earnings per share (EPS) of 7.7p, implying the shares are being priced on a forward PE ratio of 7.5. Analysts are pencilling in a pay-out per share of between 1.8p to 2.5p for 2021, a realistic possibility given that Mission’s management own more than 40 per cent of the equity and are committed to reinstating the dividend. Bearing that in mind, Mission remains well funded, having slashed net debt to less than £1m at the half-year end, so well within borrowing facilities of £20m. Only earn-outs of £0.6m on previous acquisitions fall due in the second half.
Mission is even capitalising on the Covid-19 pandemic. In early summer, its Fuse technology incubator launched a new product, The Safe Distancing Assistant, to help people maintain safe personal distancing and to keep businesses open. By using cutting-edge ultra-wideband technology, the device provides 360-degree field of detection and is more reliable and accurate than other technologies such as Bluetooth. Mission has already sold 15,000 units (retail price of £49.99) to more than 200 customers and has a strong order book for the second half.
Trading slightly above my original entry point and on a 45 per cent discount to book value ('Alpha Research: Simon Thompson’s latest bargain buy', 11 October 2018), Mission’s modest rating fails to reflect the profit recovery that’s taking place. Buy.
Venture Life on a roll
When a company with a relatively fixed cost base has the manufacturing capacity to materially increase sales, the impact on margins can be dramatic as a higher proportion of incremental revenue is converted into operating profit. That's exactly what's happening at Aim-traded Venture Life (VLG:102p), a developer, manufacturer and distributor of products for the self-care market, as its manufacturing business scales up production from both third-party contract work and brings production in-house from earnings accretive acquisitions.
The company has also been signing a raft of deals for its key brands. These include Dentyl and UltraDEX (mouthwashes, toothpastes, tooth whiteners and fresh breath beads), and the most recent acquisition, PharmaSource, a distributor of a range of medical device products (for fungal nail infections, wart removal and women's health).
Earlier this year Venture signed its largest deal to date, a 15-year agreement worth €168m (£154m) with its existing Chinese distribution partner (rights in China, Macau and Hong Kong) for Venture’s Dentyl brand (including mouthwashes, toothpastes, tooth whiteners and fresh breath beads) and other products. In the first half, the partner placed €4m of orders for Dentyl alone and contributed £2.3m to Venture’s revenue of £16.9m. The company’s like-for-like sales increased 65 per cent in the six-month period.
The company has also been launching new products including a hand sanitising gel, DISINPLUS, which has been flying off the shelfs at ASDA and at other retailers, contributing £3.2m to first half revenues. Venture has expanded the range to eight products, including anti-bacterial sprays, at minimal cost, thus providing another lucrative revenue stream for the years ahead. In the UK, Boots will launch the Dentyl range (including new products) across 800 of its key stores in November.
The impact of the eye-catching sales growth has been dramatic on Venture’s profitability. Gross profit doubled from £3.5m to almost £7m on £7.5m of incremental sales, and with operating costs only rising by £0.8m to £4m, the company’s underlying operating profit shot up to £2.3m, from break-even a year ago. Analyst Chris Donnellan at Cenkos expects full-year pre-tax profit to rise from £1.3m to £3.3m on revenue of £30.3m to produce adjusted earnings per share (EPS) of 5.3p, up from 2.2p in 2019. He has also introduced 2021 forecasts which point to pre-tax profit surging again to £4.6m on £3m higher revenue as a higher proportion of the extra gross margin earned falls to the bottom line. On this basis, expect 2021 EPS of 6p. These estimates exclude any contribution from further earnings enhancing bolt-on acquisitions. Venture has gross cash of £6.6m (8p a share) to deploy and low-cost debt facilities, too.
The positive news flow explains why Venture’s shares have more than doubled in value since I outlined the investment case, at 45p, in my May 2019 Alpha Report, and are closing in on the 115p target price I outlined when I last suggested buying, at 92p, following the pre-close trading update (‘Targeting undervalued small-caps’, 24 August 2020). So, with the earnings risk firmly to the upside – Cenkos believe their forecasts are “conservative” – I feel that a cash-adjusted PE ratio of 16 for the 2021 financial year is still an attractive rating and raise my target to 130p. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous 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 £3.25 [UK].
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Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.