This morning’s trading update from Strix Group plc (LON:KETL) shows a positive finish to the year with trading in the last five months in line with expectations (first day of trading 7th Aug 2017). Zeus Capital forecasts are for £92.6m of revenue leading to EBITDA of £35.1m and pro forma PBT of c. £26.6m. Cash generation since August has been better than anticipated leading to a material improvement in forecast net debt. Ahead of further detail in the FY results (22nd March), the ZC estimate reduces from £58.5m to £48.0m in FY17. The improved position flows through into lower FY18 and FY19 net debt estimates. We leave income forecasts for the current year, FY18 and FY19 unchanged but acknowledge that the good performance in FY17 provides the business with a solid platform to meet FY18 growth estimates. The FY18 PER, using a 19% tax rate, of 11.1x falls to 9.3x factoring in the c.3% actual rate and the lower net debt generates an EV/EBITDA ratio of just 8.0x with gearing of sub 1.0x.
Positive start to life as a public company: Confirmation that FY17 is in line highlights the inherent value in shares that trade on 12.1x current year earnings falling to 11.1x in FY18. The reduction in net debt estimates shows the cash generative ability of the business, underpinning the 5.1% yield, and with debt to EBITDA of sub 1x for FY18 the balance sheet is conservatively geared. On the assumption pro forma profit (including interest under the pre-IPO capital structure) is in line with the ZC estimate of £26.6m, Strix will show c.16% growth in earnings following on from the 15% achieved in FY16. FY18 assumes a further 10% growth.
Operationally the business continues to move forward: The performance of the business in maintaining global market share at c.39% confirms the success of the strategy implemented by the management. It will continue to target markets that Strix has relatively low market share and regions showing sustained growth of kettle penetration, such as the US and China. The U9 suite of products that came to market in 2017 is the next step in the strategy and full automation of the manufacturing facility will help to protect margins.
Net debt estimates reduced: Forecasts had been predicated on conservative assumptions with regards operational cash generation, working capital and capex. The announcement that cash generation is materially ahead leads to a reduction in forecast net debt from £58.5m to £48.0m in FY17. This flows through into FY18 and FY19 estimates of £32.1m (prev. £42.7m) and £18.4m (prev. £28.9m).
Valuation: Despite the positive price performance since float (+38%), Strix trades on 11.1x FY18 earnings, falling to 9.3x using 3% tax rate, and yields 5.1%.
