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Simmering up for new record highs

A maker and designer of kettle safety controls and components for water heating and filtration products is maintaining its strong sales momentum and reaping the upside from a shrewd acquisition.
Simmering up for new record highs
  • First half pre-tax profit rises 30 per cent to £13.2m on 57 per cent higher revenue including contribution from LAICA acquisition.
  • Organic sales growth of 28.5 per cent excluding LAICA.
  • LAICA sales up 20 per cent year-on-year.
  • Dividend hiked 6 per cent to 2.75p a share.

Isle of Man-based Strix (KETL:359p), a global leader in the manufacture and design of kettle safety controls and components for water heating and filtration products, is maintaining the strong sales momentum that started in the second half of 2020. The group is also reaping material benefits from last autumn’s 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.

LAICA delivered £3m gross profit and £1.4m cash profit on 20 per cent higher sales of £10.1m in the first half of 2021, a healthy return in relation to the initial consideration of €19.6m Strix paid and maximum earn-out of €12m (subject to financial targets being met for 2021 and 2022). Chief executive Mark Bartlett points highlights cross-selling and up-selling opportunities for LAICA across the group’s enlarged client base by “taking a much broader range across wider geographies”, thus further underpinning organic sales growth. The bumper contribution from LAICA helped Strix’s water category almost double revenue to £10m, and its appliance category deliver a 10-fold turnover rise to £5.3m.

New product launches in both divisions are also driving sales growth, including GlaSSmart (instant water filtering bottle), MyLAICA sports bottles, tap filters, and more recently the Aurora instant flow chiller and heater. Bartlett is especially excited by prospects for Aurora which launched on Amazon in the UK under the group’s Aqua Optima brand and will be rolled out across Asia, Europe and North America in the coming months, thus building on Aqua Optima’s record first half sales performance. He highlights plans to use the patented technology to launch further new products in the coming year. Other products gaining traction include Strix’s HaloPure clean water solution (offers lead reduction and patented bromine technology, that kills bacteria and viruses) in both consumer and agriculture markets.

Of course, Strix has not been immune from the supply chain disruption and input cost pressures, but with over 90 per cent of supply based in China, commodity prices hedged and price rises pushed through then gross margins held steady at 39 per cent (excluding the lower margin LAICA) during a period in which organic revenue also increased by 28.5 per cent (34.6 per cent in constant currencies). This highlights the resilience of a patent protected business that has a 56 per cent share of the kettle controls market, is leveraging its expertise in both water heating and filtration segments, and has industry leading decarbonisation targets. Moreover, completion of a new facility in China (cost of £20m) has boosted capacity by 80 per cent and offers potential to increase automation from 73 to 85 per cent of total production, thus protecting margins further.

The board’s guidance supports 30 per cent annual revenue growth and underpins Zeus Capital’s estimates of adjusted pre-tax profit estimate of £34.6m (from £30.9m in 2020), earnings per share (EPS) of 15.7p and a 10 per cent higher dividend per share of 8.7p. Furthermore, with free cash flow set to rise by more than half next year to £25.1m (Equity Development) then forecast year-end net debt of £40m (less than one times cash profit) is set to fall sharply over the coming years while shareholders can expect further generous increases in the pay-out.

This has not gone unnoticed, hence why Strix’s share price hit a record high of 385p after I last suggested buying the shares, at 293.5p (‘Simmering up for a chart break-out’, 27 May 2021), and smashed through my 330p target in the process. I first recommended buying at 100p, in my pre-IPO analysis (‘Tap into a hot IPO', 7 August 2017). The shares now trade on a 2021 price/earnings ratio of 22.9, a three point ratings discount to a cohort of other specialist engineering UK-listed businesses including Halma (HLMA), Rotork (ROR) and Genuit (GEN). Strix’s leading operating margins of almost 30 per cent coupled with a top quartile forecast dividend yield of 2.4 per cent suggests a further narrowing of the ratings discount. I raise my target to 390p. Buy.

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