Since listing in Aug 2017, Strix Group (LON:KETL) has consistently highlighted the resilience of its business through its ability to hit forecasts despite the uncertainty of trade wars, Brexit and slower consumer confidence. Today’s pre-close states it will again meet consensus profit expectations which is in the range of ZC’s estimates of £31.1m operating profit and £29.7m PBT. The controls business maintained its leading market share globally and in all regions with the market growing at a solid c. 4.5%. The Water division had a slower year growing at 6% but, as expected, performance improved in H2. Net debt of £26.3m is better than forecast due to a combination lower capex and better working capital. The shares have not participated in the Q4 rally partly because of the strong performance during the year (c. 38%). However, the valuation still looks compelling at 12.5x current year forecasts for a such a resilient business. The yield of 4.1% remains attractive with the company confirming it will increase the FY19 dividend by 10% to 7.7p.
- Margins continue to exceed expectations: Operating margin of 31.9% is 130bps ahead of expectations despite the negative impact to profitability in the year from the acquisition of HaloSource. This highlights the strength of the business in maintaining margin within Controls despite pressure on pricing. Our assertion remains that the mix effect of selling high margin components into the structural growth market of North America is underpinning this. Guidance at the interims for the core control business to see FY volume growth of c. 3% and no movement in price looks broadly to have played out as expected.
- No material changes to forecasts but we adjust revenue numbers to reflect the better margin performance: Strix has consistently outperformed in terms of margin since it came to market, a combination of working hard to attain operational improvements, to offset annual price deflation, and mix. FY19 looks is if it is following this trend resulting in ZC revenue forecasts reducing marginally, c 3.0% annually, across the forecast period. The higher margin run rate was flagged at the time of the interims (18th Sept) so should not come a surprise. Profit forecasts are unchanged.
- Diversification progressing as new products coming on stream: Twelve new products across the water and appliances categories will be launched during FY20. Highlighting the intention to diversify into areas that capitalise on Strix’s core competences and away from the dependence on Controls.
- Valuation: Strix Group shares performed well during 2019 but failed to participate in the market rally at the end of year. This leaves it trading on 12.5x FY20 earnings with a yield of 4.1% post a 10% increase in the dividend in FY19.
