Strix: The Super Stock Mid Cap With A Moat (and A 4% Yield)

28th Jan '20 by Jack Brumby

34 comments 6571 reads

Strix (LON:KETL) might just be the best UK-based, world-leading niche designer and manufacturer you’ve never heard of.

This mid cap Industrials company is one of the key players in its core global market of kettle safety controls (which prevent kettles from overheating) and is busily expanding into all things related to water heating, temperature control, steam management and water filtration.

Strix continues to develop products and processes in additional large domestic appliance markets - two important examples being the launches of Aqua Optima water filters in 2003 and Tommee Tippee Perfect Prep in 2013.

The company is an important part of the domestic appliance value chain and is regularly consulted on matters by original equipment manufacturers (OEMs) and brand owners alike regarding areas where it is considered an expert.

Although operating and net profit growth have not been too exciting in recent years, the group has been busy investing in its products and operations. R&D spend has been going up and Strix sees a number of growth opportunities.

x0ONzcW3nBrgLLSRHCvZ6Vk_CN9vvjmhJd4VCTMbny2ra42TTeOrdht8Pp1v4SuX5RoNHCwv45VVnjFmhr6kNo3dMJZrl4w4E7qjl11fKQEEu_9rOswXJDWN8_zpMhPi8uT8blhA

The group has committed to launching twelve new products across the appliance and water categories during 2020, as part of its “strategy for enhancing its core technologies to develop innovative and sustainable products”, and it is also looking for “strategically compelling acquisition opportunities” in this area.

Strix catches my eye for several reasons. It is a high quality operator and an established expert in the domestic appliance value chain, it has a dominant and entrenched market position backed up by patents and long term customer relationships, and it has a cash generative business model. Net debt is going down and dividends are going up. According to Stockopedia, Strix is a high QM, high VM Super Stock.

So, with its shares trading at just 12.2 times forecast earnings, is this our chance to get involved in a high quality, dividend paying UK manufacturer with an economic moat?

History and operations

Strix traces its roots as far back as 1951, when a man named Eric Taylor founded Castletown Thermostats. Taylor invented a revolutionary thermostat used during the 2nd World War to control heated flying suits worn by bomber crews at high altitude. This high-tech combat innovation then became, rather brilliantly, the foundation of the modern kettle control.

vcq5rttv5kiPtktGzD1bgycc_opAE6cNoM0aGOh6rW0lZqAuttn5nh5MYY3-JSqrZPna-owb7XHCCgNnrN2WQiQIlak4zd1MHsDYcPAauPwLGrFhiEBKi8yuYize8J44PspA9cA4

In 1981, Eric’s…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Damian Cannon

29th Jan '20

Excellent article Jack which concisely and accurately captures the strengths and weaknesses of £KETL.

I've been doing some analysis of my own here and it's clear that the PE owners ran the company as a total cash cow. So much cash was extracted that both R&D and maintenance capex were reduced below sustainable levels. At the point of IPO the PE company loaded as much debt as possible onto the company and ran off with that money too!

Despite this the business has made a good fist of paying down this debt and preparing for the future - principally by building a brand-new factory. This should reduce costs and make the business more profitable but it won't generate growth in and of itself. Instead new markets need to be accessed and perhaps water filtration will be the catalyst.

I do have a reasonable holding here and see Strix (LON:KETL) as a reasonably secure if unexciting investment. Probably more upside risk than downside hopefully.

JMichaelCharlton

Very interesting, China's a bit of a worry at the moment though...Worth keeping an eye on I think

jrochest

Great article, thanks. My Strix (LON:KETL) shares are up 42% and my largest holding. I hope I never have to sell them.

OldSchool05

Graham discussed this stock last week too. The point that stuck out for me in his analysis was regarding the extent of future life of the patents.

Does anyone have a view or any research in this area?

beatingmrindex

Was going to ask the same question

Mnomis

Thanks. Seems like borrowed to buy back equity (with negative equity on balance sheet) - will also have a better look when I get a chance as is an interesting company.

GrahamF

“In March 2019, Strix acquired the Astrea product from HaloSource for $1.33m. This gives the group “access to world-class R&D knowledge and skills within the water filtration sector”, an increased presence in the promising US market and can also help in distributing water filtration products into China. The acquisition is expected to be earnings enhancing in the financial year to 31 December 2021.”

Halosource were a tiny failed company. One of the many failures of Woodford. It is highly unlikely that any of their technology was world class in any way. It is also highly unlikely that this provides significant increased presence or help in any market as Halosource were too small to provide that.

shipoffrogs

There's some information here on one of their products which suggests world class technology in filtration:
https://astreawater.com

Jack Brumby

30th Jan '20

Maybe next time - if you don't ask you don't get...

Interesting, I suppose PE owners will be PE owners...

Thanks Damian, that's certainly the impression Strix (LON:KETL) I have come away with as well. I'd like to hear more from management when they release their annual report.

As other commenters have noted, a lot of its business does take place in China and there is even the Coronavirus to consider. If operations are ever severely disrupted, though, the company has a strong level of interest cover and should be able to ride out the storm.

willhampson

Very interesting article thanks. Taking a short term view, it's interesting that the share price has held up so well of late. Clearly, the operations in Guangzhou will be significantly impacted (HK to a lesser extent). My wife's family are originally from the two neighboring provinces Guanxi and Fujian and in both workers have had the New Year vacation period extended for at least two weeks, so I would be surprised if the facility in Guangzhou is not likewise impacted. I have heard the plan is for this to be increased, save as for core industries. Hopefully it'll all be resolved soon. No position.

pj8

The other aspect that Strix points out is that the use of kettles in certain markets (such as, surprisingly, the US and Italy) is low. Coffee and tea buffs prefer to make coffee and tea with water just below boiling point (depending on the type of tea or coffee) - and Strix machines can regulate the temperature to fit these requirements. A change of behaviour in these markets could offer tremendous growth.

To this I'd add boiling an egg - keep the temperature to no more than 80C and the yolk stays soft.

I'm a holder...

Edward King

My only concern about Strix is the recent news of the rapidly spreading coronavirus in China, but i take note of the points raised in the above article.

Regards Edward

Sorry SOF, but that’s their own publicity.

But let’s give them the benefit of the doubt and say it is better than other tech out there.

The fact remains that they didn’t sell enough of this when part of Halosource to keep Halosource afloat and so has little credibility in my view. I speak as someone who spent a long time working in industrial water technology.

Smudger

Interesting article, which I need to read again more thoroughly. Per references from Morning Star & other authors, one of the key metrics of a "wide moat" or "sustainable competitive advantage" is a high Return on Equity (e.g. over 17%). I notice that ROE is not available on the stock report page. This makes sense since the book value (denominator for ROE) is not provided. What is the reason for this lack of basic company data?

Return on Capital Employed, looks good however.

How do you derive a Value Rank which is supposed to include Price/Book Value?

Many thanks.

OK, I just saw the book value is negative. Must be a boat load of debt. So I infer all calculations with book value as input are simply denoted as n/a? Wouldn't negative book value contradict the idea of a "wide moat"?

31st Jan '20

David
No; the reasons for the debt are referenced in the comments above.
The debt hasn't arisen as a result of the company's operation, so I don't think you can read across that the debt subverts the notion of a moat here.

Buffett_WannaBe

Thank you for a really thorough article.

Stocks123456

29th Feb '20

Can someone please explain why the retained earnings figure is negative if they have been making profits. Dividends cannot be paid if -ve reserves.

Strix is incorporated in the IoM and there it seems dividends can be paid if the company is deemed solvent.
I guess the negative reserves arose as a result of the company restructuring prior to its recent IPO.

Strix: the Super Stock mid cap with a moat (and a 4% yield)

History and operations

Unlock the rest of this article with a 14 day trial

About the Author

Jack Brumby

34 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...