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Strix cuts profit forecast as China factory closures hit manufacturing


For a business that managed to navigate through the turbulence of the pandemic, it seems unjust that Strix Group LON:KETL should fall at the final hurdle, suffering a painful shedding of two-thirds of its equity value in 2022. The business faced a significant blow last week, as it issued a profit warning and revised expectations for its full-year results, pouring a kettleful of cold water on the outlook for 2023.

Much of the damage to the kettle control company has been inflicted by the draconian lockdown measures in China. Strix manufactures most of its products in China and a lot of its customers (kettle manufacturers) are based there. In Strix’s latest update to the market, the company noted that two out of five of their largest customers have been impacted by factory closures. As a result, Strix has been unable to ship orders to them. Such disruption has acutely affected appliance manufacturers over other sectors too, with total Chinese exports of small appliances down 20% in October compared to a total drop of 0.3% across the economy.

Strix’s leadership team has attempted to mitigate the impact of lockdown disruption by reopening a secondary production facility. However, given a large proportion of Chinese production takes place within the severely impacted manufacturing hub of Guangzhou, there is likely to be a reduction in order flow for the foreseeable future or until Covid restrictions are lifted.

Profit forecast downgraded

The disruptions resulted in Strix revising its profit after tax (PAT) forecast downwards to GBP23m from prior expectations of circa GBP28m earlier in the year and projecting financial impacts to continue into 2023. Strix did not provide commentary on revenue impact or the fate of its dividend, which, at a rate of over 8p per share delivered in 2021 and 2022, would yield a 10% return in the coming year should it not be subject to a cut.

We do, however, have access to Strix’s house research provider Equity Development’s notes. Equity development has suggested that core revenues for Strix will decline by 10% in 2022, which is likely enough, along with a larger debt balance, to justify a trim to the expected shareholder pay-out next year.

On a more positive note, total revenues for the group are likely to only fall 5% in 2022. Total revenues are expected to bounce back strongly by 20% in 2023, as Strix benefits from the completion of its transformative acquisition of Billi, an Australian ‘on-demand’ hot water tap manufacturer.

Tapping in to growth markets

Given the current environment and the impacts Strix is facing across its core business, it may seem like a strange time to pursue M&A strategies. However, looking at the details of the acquisition, there are many reasons to suggest Strix is acting in the best interests of investors by progressing with the deal for Billi, as announced in early October.

Strix already has a foothold in water filtration markets, with its brands Aqua Optima and other consumer filtration systems acquired in its purchase of LAICA, an Italian manufacturer back in 2020. Water filtration products are forecast to grow strongly in the coming years, with powerful consumer trends such as the need to move away from unsustainable single use bottled water and the need to filter microplastics and other chemicals from our water sources.

The move to acquire Billi fills a gap in Strix’s product portfolio, with access to Billi’s premium filtration systems that are frequently used in commercial settings. Eleven percent of Billi’s revenues are derived from replacement filters, providing a growing recurring stream of revenues for Strix. Billi has been growing revenues in the double digits over the past five years, suggesting that the purchase will continue to enhance Strix’s top line. The total consideration for Billi amounted to GBP38m, which values the buyout at a multiple of just 4.6x EBITDA, a very reasonable price for a good asset.

Will kettle controls return to health?

Whilst Strix continues to make progress in its water and appliance categories, over 60% of revenues and the lion’s share of profit stems from the manufacture and supply of kettle control elements to kettle brand manufacturers. As mentioned earlier in this article, Strix is facing operational challenges in this segment, but for investors prepared to look beyond the short-term challenges, there are signs that the kettle control business can return to its resilient form.

Strix is the world leader in kettle controls, with a forty-year history of manufacturing kettle safety mechanisms. It has improved its total market share from 54% in 2019 to 56% by 2021, taking a 75% share of regulated markets, offset by a share of 35% in less regulated appliance markets. Whilst issues in China have currently depressed revenues from this segment, Strix has maintained global market share at 56% throughout this period, suggesting that a bounce back in manufacturing activity could lift Strix’s prospects significantly.

This segment also looks good in terms of long-term profitability, with Strix achieving full automation across 77% of production lines, with more operational efficiencies set to come as Strix embeds new acquisitions. Due to Strix’s strong competitive position as market share leader, the company has executed a number of price increases with the most recent being in May earlier this year.

Summary and valuation

Strix has been dealt a difficult hand in 2022, with the business affected by events largely out of management’s control. Despite the poor operating environment, Strix has remained profitable and has defended its market share, which should result in a return to form when the situation improves in China.

The company’s shares opened trading today (6th December) at 80p. Strix’s shares have tracked in the range of 74.7p to 315p over a 52-week period. The appliance-manufacturing company has offered a year-to-date return of -73.1% and a one-year return of -72.2% giving the company a market capitalisation of GBP183.7m.

The brutal share price decline in 2022, has left the business on a price to earnings ratio of 7.7x forecast earnings this year and a substantial dividend yield of approximately 8% when forecasting a small trim to the pay-out in light of suppressed results.

With the acquisition of Billi and a high likelihood of the kettle control business returning to prior health, now could be a great time to buy a few shares in the group.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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