Strix axes dividend as it aims for a profit recovery

Isle of Man-based Strix (KETL:64p), a global leader in the manufacture and design of kettle safety controls and components for water heating and filtration products, has suspended its dividend to deleverage the balance sheet.

Although the group managed to reduce net debt by 4 per cent to £83.7mn, a gearing ratio of 2.19 times cash profit is uncomfortably close to the 2.25 times covenant limit. The group’s bankers have increased the limit to 2.75 times for the duration of the remaining facility, but cash flow will now be directed at reducing debt. Analysts at Zeus Capital expect net debt to be cut to £78.8mn by the year-end, or 1.9 times cash profit estimates of £41.8mn, which embeds 5 per cent growth. The plan is to resume dividend payments in 2025 based on a sustainable payout ratio of 30 per cent of adjusted net profit.

Billi comes to the rescue

The annual results were buoyed by a maiden 12-month contribution from Melbourne-based Billi, a maker of premium filtered and temperature-controlled water systems, used by architects and designers to comply with ESG credentials in Australasia. Acquired at the end of 2022, the company contributed adjusted operating profit of £9mn (28 per cent of the group total), which helped offset the £6.3mn increase in net finance costs due to higher interest rate rises.

Billi’s ongoing outperformance also mitigated weaker trading at the group’s consumer goods division, which suffered a softening in the appliances category market and challenging trading conditions in the Asia-Pacific region. Accounting for 18 per cent of group gross profit, the unit was restructured at the start of 2024 to streamline operations and drive profitable growth.

Strix’s kettle controls division failed to simmer much last year, too, delivering modest 2.7 per cent revenue growth and edging up gross profit to £27.3mn, or slightly less than half the group total. The pace of recovery continues to be slower than anticipated due to the ongoing impact of the cost of living crisis. That said, recent incoming order rates are now tracking in the right direction.

Although Billi is expected to continue delivering double-digit growth, Zeus has reined in its 2024 revenue estimate from £162.5mn to £153.9mn. Combined with higher interest charge guidance of £9mn and an expected fall in gross margin from 39.5 to 37.7 per cent, it prompted analysts at Zeus to downgrade their 2024 pre-tax profit estimate by 9 per cent to £24.2mn. Equity Development has similar forecasts. True, it still represents 10 per cent growth on 2023, albeit earnings per share (EPS) are only forecast to edge up to 9.4p due to a higher tax rate.

So, having last rated the shares a hold, at 58p (‘Does Strix have recovery potential’, 21 September 2023), I feel that a cash profit multiple of 5.4 times to enterprise valuation is about right for now given that investors will remain cautious until there is evidence of a profit recovery. Hold.

■ Special offer. Simon Thompson's books Successful Stock Picking Strategies and Stock Picking for Profit can be purchased online at www.ypdbooks.com at the special discounted price of £5 per book plus UK P&P of £4.95, or £10 for both books plus UK P&P of £5.75, subject to stock availability.

They include case studies of his market beating Bargain Share Portfolio companies outlining the characteristics that made them successful investments. Simon also highlights other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Full details of the books’ content can be viewed on www.ypdbooks.com