Strix’s profits boil dry

Shares in Isle of Man-based Strix (KETL:116p), a global leader in the manufacture and design of kettle safety controls and components for water heating and filtration products, sold off 18 per cent on results day after the board reined back their full-year pre-tax profit guidance range to £27mn to £29mn, well below consensus estimates (£30.5mn to £32.4mn) and last year’s result (£32.2mn).

In the first half, pre-tax profit declined 12 per cent to £11.6mn on seven per cent lower revenue of £50.7mn, with sales in peripheral geographies being adversely impacted by the ongoing conflict in Ukraine while macroeconomic headwinds subdue demand in the kettle category in key export markets. Divisional revenue declined by almost 12 per cent to £34.8mn in the six-month trading period with revenue in key regulated markets of the UK and Europe being almost 20 per cent lower.

Historically, the business has enjoyed a strong second half bias to trading and the revised profit guidance suggests a 40 per cent increase in underlying post tax profit in the second half compared with the first six months of the year. However, analysts at Shore Capital, who have proved prescient in their sell recommendation last year, note that the complementary acquisition of Vicenza-based LAICA in 2019 means that the group is more exposed to a global consumer downturn. 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 group’s water appliance categories account for around 30 per cent of total revenue.

It’s worth noting, too, that potential lockdowns in Guanghzhou, where Strix has manufacturing operations, increase earnings risk, especially as the revised profit guidance is predicated on an improvement in trading conditions in China, which admittedly has already started to come through.

Following the profit warning, analysts at Shore Capital and Zeus expect full-year adjusted earnings per share (EPS) to fall from 14.9p in 2021 to 13.4p. Although Zeus is predicting a rebound in 2023, forecasting EPS of 15.6p, Shore anticipates further earnings pressure and only forecasts EPS of 11.8p. The interim pay-out was held at 2.75p a share and, based on a maintained annual dividend of 8.35p, the shares offer a dividend yield of 7.2 per cent.

I advised taking a cautious stance at the time of the annual results (‘Delivering profitable growth’, 30 March 2022), having first recommended buying the shares, at 100p, in my pre-IPO analysis (‘Tap into a hot IPO', 7 August 2017). Following this year’s de-rating, Strix is now valued on 9.5 times forecast current year operating profit to enterprise valuation, and a price/earnings (PE) ratio of 8.7. Hold.

Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.

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