Strix Group “Valuation underpinned by longer term aspirations” says Zeus Capital

Yesterday’s Strix Group plc (LON:KETL) Capital Markets Day confirmed good trading has continued during Q3 meaning FY20 profit estimates are ahead of ZC expectations, leading to increases in FY20 and FY21 earnings estimates of 1% – 3%. The presentation also outlined the strategy of the business over the next five years and the potential for growth in the Water and Appliances divisions, post the LAICA acquisition. The mix will change materially, non-Control derived profit will exceed 40% of Group by 2025, from the c.10% in FY20 based on revenue doubling. 

Strix has maintained guidance throughout the year and continually confirmed its intention to pay both the final FY19 and interim HY20 dividends. Guidance that profits would be at least in line with FY19A was best in class and confirmation that underlying, excluding the acquisition, Group profitability has improved yoy is impressive. The shares have reflected the resilient profit performance outperforming the market by c. 40%. The current rating of 15x FY21 earnings has material scope to increase as the business continues to deliver resilient and growing earnings over the next few years.  

  • Targeting a doubling in revenue in the next 5 years: The two acquisitions undertaken since Strix floated are different but fulfil the same aim of laying the foundations for sustained growth. They broaden the product portfolio and geographic footprint and with the additional scale it provides the opportunity to materially grow both the Appliance and Water divisions. At yesterday’s Capital Market Day, management outlined its target to double revenue over the next five years whilst seeing gross profit increase by over 70%. This will reduce the reliance on the Controls division with its contribution to profitability falling to c. 55% from the 90% in FY20.
  • The resilient performance during FY20 warrants the re-rating the shares have experienced: Maintaining guidance during the year, growing profit yoy and committing to paying the final dividend for FY19, the interim for HY20 and the final for FY20 needs to be put in the context of the exceptional circumstances experienced and the actions of peers. On this basis, Strix Group has materially outperformed and the re-rating the shares have seen from c. 10x-14x earnings to 15x-19x is warranted. The growth strategy outlined yesterday at the CMD suggests that as the business becomes less reliant on the lower growth Controls business a further re-rating can be sustained    
  • Valuation underpinned by longer term aspirations: The c. 15x FY21 earnings the shares currently trade on does not look expensive when factoring in the potential growth from the business as it diversifies. It is also supported by a yield of over 3% which has not come under threat during the year, unlike many other companies.
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