Strix Group (LON:KETL) has announced a solid set of interim results providing a high level of confidence in the FY18 profit before tax forecast of £29.1m. Revenue increased 1.5% to £42.9m (HY17: £42.2m) and gross profit increased 3.5% to £16.3m (HY17: £15.7m) on margins increasing 70bps to 37.9%. Adj. Operating margins increased 120bps to 27.9% and on proforma numbers profit before tax increased 10.4% yoy to £11.0m (HY17: £10.0m). The mix within the controls business has better balance. Regulated Markets continue to grow strongly at c. 3%, albeit down from the 5% in FY17, being driven by the growth market of North America. China has returned to growth reporting 6% and Less Regulated grew 8%. We leave PBT forecasts unchanged across the forecasts period but reduce the assumed tax rate from 19% to c.4% based on management guidance. This increases EPS by c. 19% in each year. On new earnings estimates the shares trade on 12.1x and yield 4.2% with the management confirming its commitment to pay 7.0p of dividend in FY18 followed by 7.7p in FY19.
Kettle control market growth underpins the current year outlook: Strix’s global market share is estimated to have been maintained at c.38% based on volumes increasing c.7%, marginally ahead of the market growth of c.6%. All regions experienced growth with China seeing 6% against the negative 6% in FY17. Less Regulated Markets have seen a moderation in growth to c.8% from 12%, but in line with the long-term growth rate. In Regulated Markets the growth rate of 3% is better balanced than the 5% reported for FY17. Growth is being driven by North America where penetration has increased to 15% whilst the more mature markets in Northern Europe have, as expected, slowed to a more normal growth rates.
Margin underpinned by mix and efficiency gains: The Gross margin progression of 70bps to 37.9% reflects management’s commitment to driving efficiency gains and a beneficial mix effect from slower growth in China and faster growth than expected in America. At the operating level margins increased 120bps as the improvement in gross margin was magnified by tight control of costs. FY18 forecasts assume a flat gross margin yoy due to mix of lower margin China and Less Regulated volume in H2.
Change in tax rate: At the time of the initiation (27 Sept 2017) a conservative UK corporate tax rate was used to calculate earnings. With greater guidance from management this is revised to use a tax rate that more closely matches the cash tax rate. This increases the ZC earnings forecasts by c.19% across the forecast period.
Valuation: Strix Group shares trade on 12.1x current year earnings falling to 11.2x in FY19 and yield 4.2% on a conservatively geared balance sheet.
