Strix - Modest Valuation And Long Term Growth Potential

4th May '20 by Jack Brumby

22 comments 4995 reads

About three months ago I covered Strix (LON:KETL) (here) . Quite a lot has transpired since then.

The group has just released its FY20 annual report and I’m interested to see how it is getting on in this COVID-19 era. In my view Strix is a very promising company and could become much larger in time.

I think this because:

Strix occupies an important position in the global domestic appliance value chain,
It has world class facilities,
It has patents that it vigorously defends, and
It is investing millions in research and development,

The group has a total of 14 new products set to be launched in the coming year. With a market cap of less than £400m, I think there is plenty of scope for steady growth.

In the meantime, this is a high quality, cash generative, modestly valued company that rewards shareholders with an attractive yield and is well placed to defend its favourable market position. Its shares have rebounded strongly after tumbling in late March and its StockRank is also showing signs of recovery.

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What can we take from the FY accounts?

Headline results

FY19 has been a continuation of established trends. Growth has been lacklustre and even negative on an unadjusted basis:

Revenue +3.3% to £96.8m
Operating profit -6.1% to £24.2m
Adjusted earnings per share +2.1% to 15.2p (adjusted PE ratio of 12x)
Total dividend per share +10% to 7.7p (4.2% dividend yield)

The company has strong long term prospects though thanks to its entrenched market position and increasing levels of research & development spend (in both relative and absolute terms):

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With 14 new products slated for FY20, investors will be expecting to see signs of growth in the next year or two.

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I’m not overly concerned with the current lack of profit growth because of the following points:

Strix is high quality - it is financially sound, cash generative, and profitable,
It is expanding its operations, investing in R&D, and bringing down net debt,
Its market position is strong and is backed up by valuable IP that is vigorously defended,
The group pays out an attractive and comfortably covered dividend to its shareholders, and
New product launches are imminent.

COVID-19 (lack of) disruption

It is perhaps surprising that the two companies I have recently looked at with large manufacturing bases in China - Strix and Volex -…

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mattgws

4th May '20

Thanks Jack, delighted to log in and see this as I bought in to Strix this morning on the opening bell!!

I think the PE ratio shows the company priced currently at fair value when you look across the Industry and historic PE metrics, but the potential for growth and ongoing operational excellence makes me a buyer.

14 new products point to not only a diversified product portfolio as you mention but the potential to find new revenue streams and when you look at the award winning stays these are achieving it can only bode well for future sales.

Operational excellence through not just ‘Lean’ but combined with ‘continuous improvement’ initiatives alludes to an operational culture where all minds within the business are engaged in waste reduction and value creation, from shop floor to CEO and should lead to improved margin and ability to compete on price & quality in new markets.

Thanks again for the write up!

sharw

Stephen English is a great fan of Strix (LON:KETL)
( https://www.stockopedia.com/content/stephen-english-piworld-webinar-a-plague-on-all-our-houses-how-to-repair-some-of-the-damange-590268/ is worth watching)

Jack Brumby

5th May '20

I keep meaning to look at this! It was linked in the previous article comments as well so must be worth a watch.

Brilliant Leader

A great article Jack. Strix (LON:KETL) is a core holding of mine, so I am clearly biased. Just a quick heads up that they go ex-dividend for 5/7ths of their overall annual dividend this Thursday, 7th May.

Cheers,
Simon

The Phoenix

Hi Jack

Should have replied to you directly re my previous post.

Great write up on Strix but any thoughts/concerns on earnings manipulation risk being flagged as high on Stocko ?

Thanks Andy

DWit199

clarea, if you go to the Strix (LON:KETL) stockreport and click on the m-score link it will take you to a breakdown of the M Score. There are two factors marked with a red cross, depreciation and receivables which are major contributors to the poor score.

The depreciation is explained in the annual report "Depreciation increased to £4.2m (2018:£3.2m) as a result of the adoption of IFRS 16 which incurred £1.3m of right of use asset depreciation"

I can't see a reason for the increase in receivables relative to sales.

Many thanks for the steer presuming risk is profits could be being booked on receivables before the money has actually been banked ?

In the 1999 paper Beneish says of the DSRI,

"This variable gauges whether receivables and revenues are in or out-of-balance in two consecutive years. A large increase in days sales in receivables could be the result of a change in credit policy to spur sales in the face of increased competition, but disproportionate increases in receivables relative to sales may also be suggestive of revenue inflation. I thus expect a large increase in days sales in receivables to be associated with a higher likelihood that revenues and earnings are overstated."

Reviewing my comments on depreciation I realise that the situation is rather more complicated than I initially thought and the explanation I came up with is wrong. I will ponder it a little longer.

MacBoyUK

8th May '20

@ Clarea - Odd. I'm looking on the main Stocko page for this stock four days later (Friday 8 May) and that metric is rated as 'low'? How did it change so rapidly?

navtis

Very interesting, potentially useful and clearly some people were aware of this report as early as 4 May, presumably those already watching the stock. Still, your email alert to it, received today, would have been potentially more advantageous the day before the ex-divi date than the day after… Ho hum.

Lyn Davies

Been watching it for a while now, may dive in next week.

Just had a look your correct very odd

skinner66

have held strix for over one year. where its based in china hasn't really been effected with virus. its only challenge is chinese companies trying to make fake similar items. but patents have held up. and stopped with compensation.. all depends how long patents are valid for. but strong company

11th May '20

The Annual Report was published on 4 May. Following this, the Stockopedia figures were updated, which is what caused the change. I am slightly surprised by this as the StockReport for Strix had already been updated after the final results were published on 18 March. What changed between the results and the annual report?

Hi Andy,

Apologies for the delay here - it actually prompted some unscheduled investigation on my part...

The receivables figures for 2018 & 19 were not comparing like with like for a little while last week. Our data provider was giving us a gross figure for 2019 and a net figure for 2018. It gave the impression of a big gap up in receivables year-on-year.

You will notice now that our data provider has corrected this. The 2019 net receivables figure has gone from c£9m to c£6m and KETL passes the earnings test as a result.

Thanks for pointing this one out!

Thanks for getting back to me Jack keep the articles coming a lot of the stocks you review come up in my quant screen so good to have another more experienced pair of eyes input.

Appreciate your input

Andy

23rd Sep '20

Would there be any chance of getting your latest views on Strix (LON:KETL): after the update today Jack.

Regards Andy

William K

27th Jan '21

Strix (LON:KETL) beginning to look interesting. Possible breakout soon?

Johnsy

7th Jul '21

Earnings manipulation risk is high again.

Net goodwill has jumped from zero to almost 10m. Net intangible assets have tripled. 2020 sees deferred income tax appear on the balance sheet for the first time.

It's going on my short sell watch list.

shipoffrogs

Isn't that just all a consequence of one recent acquisition (I haven't checked)? Probably more meaningful to consider the pros/cons of the acquisition.

Strix - modest valuation and long term growth potential

Headline results

COVID-19 (lack of) disruption

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Jack Brumby

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