Strix (KETL): reaching boiling point today?

Friday, Jun 08 2018 by
32

First of all, apologies for the pun in the title, couldn't help myself!

Secondly, I would like to thank Ed at Stockopedia, and Damian Cannon for organising the Stockslam event in London last night - it was an excellent format, and I met lots of great people including the great Paul Scott in the flesh! For note, I proposed Harvey Nash (LON:HVN) as my stock pick at this event (3-minute elevator pitch), you can read more about it in a short article I posted here on Stockopedia recently... 

Now, on to the varied attractions of Strix (LON:KETL)...

£288m market cap at present, and is an AIM100 index member. 

KETL: The ranks

First of all, the ranks - Stockopedia ranks this stock highly at a combined 89 Stockrank, led by 89 for Momentum.

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Strong EPS and price momentum

Focusing first on momentum, as it is the most timely indicator to note today - price momentum has broken out to a new high and is today more than 50% above the IPO price of 100p (at issue on August 8, 2017). 

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Price momentum is roughly following earnings momentum, as you can see from the broker EPS upgrade back in late April (from the house broker Zeus Capital):

5b1a5853a29aaKETL_EPS_mom.JPG


From a purely technical analysis viewpoint, the breakout from the sideways trading range that has existed since the April 2018 IPO suggests a minimum price target of 171p, versus 156p now. 

A great quality business!

On to the business model, albeit very briefly,

Graham Neary of the SCVP likes Strix, as detailed in this SCVP report: https://www.stockopedia.com/co...

Why is this? Well principally because it has great intellectual property (IP) and market share in controls for  kettles, on a worldwide basis. to quote Graham:

 It develops and produces commonly used safety controls in kettles, for which it owns the patents. HQ is on the Isle of Man, and manufacturing takes place in China.

Its numbers are in the billions. Today it reports that it sold its two billionth product late last year. Previously, it reported that its products were being used around the world over a billion times each day.

They have been aggressively defending this global IP as the company outlined on 23 May:

Strix has a portfolio of intellectual property protecting a variety of product features across its product range.  The portfolio includes over 150 patents and Strix relies on these and, where they have expired, other IP and unfair competition law to take legal action, both to defend the Company's commercial position and ensure consumer safety.  Examples of action taken in the last six months in China and Europe include:

·    As detailed in the recent Preliminary Results announcement, the China domestic market has seen an increase in electronic multi-cooker appliances and Strix will launch a revised control in H2 2018 to secure a share of this growth opportunity whilst continuing to defend its existing patented technology.  Against this background, Strix brought patent infringement claims against 19 appliances sold by Bears Electric Appliances Co., Ltd to the Shanghai IP Court which was successfully settled as set out below.
 
·    In an example highlighting the different ways the Company can protect its position concerning its older products, Strix brought a claim based on copyright law against Adriaanse Import & Export B.V. and Edco Eindhoven B.V. who had imported kettles into the Netherlands which, according to Strix, incorporated copies of its controls and connectors.  The parties subsequently settled matters as set out below.
 
·    Strix continues to monitor growing internet product sales and takes action where appropriate. The Company recently brought complaints of electronic kettle patent infringement to the attention of Amazon which swiftly resulted in five webpages being removed from their platforms across Europe.  One vendor, Kinden, settled with Strix as set out below, agreed to replace the alleged infringing electronic kettle control with a Strix product and has since been re-listed. 

Certain well-known small-cap fund managers have been building 5%+ positions in Strix, including Premier Asset Management, Woodford (Income Focus fund), my personal guru favourite Miton and Schroders. 

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Yes, perhaps not the fastest and sexiest market in the world, but there remains plenty of potential for take-up of their product in emerging markets such as China and India...

Profitability and free cash flow generation is strong

The strong IP portfolio and global market share in kettle controls is reflected in strong profitability and robust free cash flow generation, with operating margins approaching 30% and free cash flow per share offering a FCF yield close to 10%:

5b1a604505f38KETL_qual.JPG

And this comes after Research & Development (R&D) spending of £6.2m in the last financial year to develop yet more patents and keep their moat deep, representing a relatively high 6.8% R&D/sales ratio

So while net debt stands at nearly £46m as at end-2017, free cash flow generation maintained at these levels would see net debt eradicated (even after dividend payments) in less than 4 years, gradually improving the overall Quality rank.

Value as well as momentum!

We have established strong profitability and good fundamental and price momentum; but Strix also offers an attractive set of valuation measures, in my view. 

A forward P/E of 11x and a well-backed dividend (and likely to grow steadily) yield to attract income investors of 4.8% are key value attractions, while the forward EV/EBITDA ratio of 9.3x is attractive for such a profitable business. 

No wonder then that the Greenblatt Magic Formula awards Strix a 93% A+ rank!

Conclusion: a good value momentum buy, with strong profitability to boot...

Disclaimer: I have bought shares recently in Strix

Perhaps a good stock to buy on this breakout to new post-IPO highs, for those who like broker price targets, Cannacord Genuity have a 210p (+35%) price target to aim for.

DYOR as always, 

Edmund



Disclaimer:  

My opinions only, not investment recommendations: Please Do Your Own Research

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Strix Group Plc is an Isle of Man-based company engaged in designing, manufacturing and supply of kettle safety controls and other components and devices involving water heating and temperature control, steam management and water filtration. The Company’s core products are kettle safety controls, which are responsible for disconnecting the power to the heating element when either water has boiled, operated with no water present, or in some products when the kettle is lifted off its base. Its control set series include U18/U88, R-series, KeAi-series, KeAi-set, U11 series, U17 series, U67 series and U9 series. Its Aqua Optima is a range of domestic water filtration products, including jugs, water filters and other related appliances. Its other products include steam boiler, instant flow heater and turbo toaster. more »

LSE Price
133p
Change
2.2%
Mkt Cap (£m)
252.7
P/E (fwd)
8.9
Yield (fwd)
5.8



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22 Posts on this Thread show/hide all

IGotPoesJacket 9th Jun 3 of 22
1

Isn’t Mr Taylor, without meaning to be rude, getting on a bit now? Has he IPO’d it to retire and if so, what’s the prospect of the company successfully replacing him?
The most fascinating thing for me about the interview was the lack of requirement for safety features in US appliances, particularly auto switch off when boiling, so a potentially huge market there if their politicians ever wake up.

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tony akram 13th Aug 4 of 22

Good article

I am a small holder but one thing did concern me which is NTAV is -£37.5 million (inc.£5million of intangibles) does anyone have any view on this . Whilst I hold I am a bit uncomfortable adding with this in mind.

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shipoffrogs 13th Aug 5 of 22

Tony
When it came to market last year - the sellers loaded the balance sheet with debt as part of their proceeds.
The way I look it as (i) the debt has not arisen as a result of an operational requirement, and (ii) the "small balance sheet" indicates it's not a capital intensive business.

It looks very attractive to me - global market leader, product that will always be required (so long as we carry on drinking tea and coffee), quality cash generative and great margins. It's not over-priced either and could look cheap if they can inject some sales growth.

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Weasel 14th Aug 6 of 22

I haven't looked at the company but I do wonder if they are at risk from the new fad for hotwater taps (those taps that provide instant boiling hot water) in homes. I appreciate there will still be a need for kettles and globally this may not have much impact but is it likely to affect their sales in UK/USA/Western Europe. From personal experience, my mother has one, she rarely uses her kettle now.

Genuine question, as I said, I haven't looked at the company.

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rjg 14th Aug 7 of 22
1

In reply to post #390594

A boiling water tap still requires a thermostat (which is Strix's area of expertise) so far from being a threat, I would've thought that these taps represent a new market to sell to...?

Edit: Strix don't make kettles - they make the thermostat controls (it occurred to me after posting that this may not be clear if you hadn't looked at the company in any detail) :-)

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Weasel 14th Aug 8 of 22
1

In reply to post #390639

I knew they didn't make kettles specifically. I mean more the potential drop in sales of kettles may affect demand for their thermostats, but clearly at that point my brain switched off and didn't register that a boiling water tap would also require one thus not a pressing issue for the company.

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shipoffrogs 14th Aug 9 of 22
1

I think the entry price for these boiling water taps is £500 - and then there's installation etc.

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alterego 15th Aug 10 of 22
1

On the subject of demand for kettles and therefore the thermostatic controls made by Strix, the last full year results presentation provides some interesting facts.

- the middle east and far east have historically low penetration but there is growing demand as a result of improving living standards and desire for western style convenience goods
- china is experiencing growing demand driven by economic expansion, a growing middle class and sustained urbanisation
in USA growth is being driven by historically low kettle ownership, around 13% compared to uk 120%

Competition is principally from "cheap" suppliers in unregulated markets. Elsewhere, the quality of controls is important and why Strix has a dominant market share.

They also say the focus on " hot water on demand" has led to two MOU's with leading brands

see https://www.strixplc.com/application/files/3315/2585/0829/Investors_Presentation_2018_March_-_Web_version_v5.pdf

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paraic84 15th Aug 11 of 22

This is a helpful article, many thanks. Does anyone know much about Strix's competitors in Europe? I am wondering how no-deal-Brexit proof the company is? It looks interesting but I am personally trying to avoid anything with too much EU exposure.

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millen 15th Aug 12 of 22

£500 - blimey! But at that price point I'd hope Strix can command an attractive margin. To me though, I can't see boiling water taps ever replacing the humble £10 kettle that has the advantage of versatility and portability - if ever there was a 'solution looking for a problem' this is it. I expect it will go the way of the fads of a few years ago, eg bidets and waste disposers in the kitchen. But kudos to Strix for tapping into this trend.

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WDWombat 5th Sep 13 of 22

I am a holder - the stock initially drawn to my attention by a complimentary and thorough write-up in a small cap publication last year. As of today (Sept 5th 2018) I am up around 20% on a Sept 17 purchase at £1.37. I confess part of the attraction was the sheer novelty of the business and the novelty of having what is in essence a UK company in a premium (est world share 38%) position in a big consumer component market. Be aware the registration and key component manufacture is Isle of Man. Main competition is, by the way, from Chinese companies and Strix itself has its main manufacturing facility in China. This market is big and should be growing though the last figures suggested a hiccup. Europe really cannot now be very large in the total though just conceivably the entry into the coffee machine market, recently announced, may increase this weighting over time. There is a lot to like about Strix. It is very strong in a pretty basic and essential product area. Though it has substantial debt the cash flow has been very strong, even after capex is taken into account. The returns - profit and capital margins - are exceptionally strong. A large part of the geographic end user base is mature, so don't expect anything but modest revenue increases, but the stock is still pretty keenly priced on earnings and the dividend policy is generous but sustainable.

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lemonjar 3rd Oct 14 of 22

I just noticed the nakedtrader decided to get himself into hot water too - http://nakedtrader.co.uk/trades.htm

please pardon the lame attempt at pun.

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paraic84 9th Oct 16 of 22

The share price dipped to 140p on no news this morning. Have I missed anything? Or is this just part of the hard sell off on some shares over the last few days as the market gets more nervous?

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jonno 9th Oct 17 of 22
1

In reply to post #405749

UK Small caps across the board appear to have taken a bit of a bruising lately, even those with fairly modest valuations, as my portfolio that includes Strix (LON:KETL) testifies to. Regarding Strix (LON:KETL) I attended the recent Equity Development presentation by Mark Bartlett, the CEO, who came across very well. My view on this morning's price weakness is that it is part of the current market malaise. The price has now recovered to around 150p.

All the best

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Glorenfeld 9th Oct 18 of 22
1

In reply to post #390969

The fad for bidets in the kitchen completely passed me by ;)

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paraic84 9th Oct 19 of 22

In reply to post #405774

I think you're right. It's part of the sell-off. I will take a look at the presentation!

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Glorenfeld 3rd Dec 20 of 22

Does anyone have any guesses as to why Strix (LON:KETL) may have appointed a joint broker? Could it be in preparation for a placing?

Their interims discuss the possibility of acquisitions "from internal resources", which made me think that they wouldn't be looking to raise more funds in the market. But, they do have some debt, which they may wish to pay down.

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jonno 3rd Dec 21 of 22
1

In reply to post #424048

I would be surprised if Strix (LON:KETL) announced a placing, although given the current market for UK stocks and in particular small caps nothing should surprise. With few exceptions most small caps, including those with conservative valuations have fallen 20% or more from their high without reason, other than negative market sentiment. Strix (LON:KETL) is cash generative and has excellent free cash flow and although it states the intention to target appropriate acquisitions it said in the recent interims that they will be funded from existing resources.

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jonno 3rd Dec 22 of 22
2

Hi Glorenfeld
Apologies for repeating that last aspect of your post in my reply regarding the intention to fund acquisitions from existing resources. I think that you have to take Strix (LON:KETL) at its word, which eliminates the prospect of a near term placing.

All the best

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