Strix is a UK-listed, electrical component supplier based in the Isle of Man whose main specialism is kettle safety controls. However, recent developments and acquisitions have diversified the business into areas such as on-demand hot water, kitchen appliances and water filtration systems. The bulk of current revenues are derived from 'Kettle Controls', a market that typically grows at low single digits very reliably, as kettles are replaced on average every five years. Strix’s position in the Kettle Control market is very strong, with a 74% market share in regulated appliance markets (Strix sells its controls to pretty much every well-known kettle brand). Strix is relatively new to the London market, listing in 2017, so hopefully, this article can shed some light on the investment case for the company and explain why I have Strix as a holding in my personal portfolio.
In order to understand Strix’s business model, I will first break down its various product lines.
Source: Strix, Kettle Control system
Firstly, Kettle Controls, the largest segment with projected revenues of £78m in 2020. Kettle Controls makes up roughly 70% of Strix’s business. Strix has numerous variations of each control, designed to fit different appliances and various power formats. With an over 70% share in regulated markets, Strix is a quality parts provider with serious scale in its niche. Market share in China currently sits at 54%, and in unregulated markets, Strix’s share is 37%, owing to various copycat products and a less rigorous approach to quality in unregulated markets. The world is becoming more safety conscious, and kettle safety controls are not embedded in the product without reason, as without quality safety controls, appliances can catch fire. For this reason, Strix is likely to improve global share as currently unregulated markets begin to pay more attention to home appliance safety. Profitability in this segment is very solid, with typical operating margin for Strix at around 27%, driven in large by profits from Kettle Controls.
Source: Strix, Water Filters
The next largest segment is the 'Water' category. With projected sales of £23m in 2020, Water makes up around 20% of Strix’s current sales. Revenue projections for the Water category are the most ambitious of Strix’s segments, with Strix projecting growth for the category to be 227% to derive £72m in sales in 2025. Bolstered by the acquisition of Italian water filtration products business Laica S.p.a in 2020, Strix’s water category splits into three main divisions:
Domestic water (on-the-go), which primarily includes water bottles with smart filters that remove unwanted contaminants and improve water taste and quality.
Domestic water (at home), which features the core Strix brand ‘Aqua-optima’ — a competitor to Brita, the market leader in domestic water filtration. Strix also has tap filtration systems and private-label goods that utilise Strix’s filters.
Lastly, Commercial water, also known as HaloSource, with its key brand HaloPure. HaloSource provides commercial water de-contamination solutions primarily to the agricultural industry. HaloSource is still in its relative infancy, with few contracts to date.
Finally, the smallest segment in Strix’s business, alongside Kettle Controls and Water, is the Appliances segment, with an array of household appliances such as cordless irons, coffee machines and baby food sterilisers. This segment is projected to deliver £11m of revenues in 2020 but increase 209% to £34m in 2025. Much of the revenue growth in this period is to be derived from product innovations such as the cordless iron, which is currently sold under the brand Morphy Richards.
The start of 2020 delivered some significant challenges to Strix from an operational perspective; as a small company listed on AIM, Strix doesn’t have the scale of a supply chain that a large global company would have. Strix also had a major project, a migration to a new factory in China. At the half-year interim report, you would be forgiven for thinking Strix was in trouble. Revenues were down 21% and factory shutdowns suggested that Strix was facing a challenging period ahead. Upon listing on the London stock exchange, Strix touted the resilience of their business model, and not three years later, this resilience would be put to the test. In the interim report, Strix alluded to expectations of a strong bounce back in the core Kettle business, with a record Q3 performance on the cards. This record result in the third quarter will see Strix delivering £94m in revenue for the full year as predicted by the capital markets presentation in November 2020. With the inclusion of the Laica S.p.a acquisition, results would actually be ahead of 2019 at £111m. This mid-year turn around to deliver a positive result for Strix’s core and total business is absolutely a reflection of the resilience of the business model, and the market has amply rewarded Strix with a gain of 110% in the share price since the pandemic lows.
However, looking back to the years prior to the pandemic, Strix hasn’t been growing at fantastically high levels. Revenue growth averaging 3% for the years 2017-19 isn’t terrible, but it probably isn’t going to deliver serious results to investors in Strix. Management acknowledges this and puts the very moderate growth down to the fundamentals in the rather slow but reliable Kettle Control market. In efforts to put technological know-how into more growth-oriented applications, Strix is transitioning to quality appliances and water filters in the respective business segments discussed earlier.
With growth in the Water segment anticipated to be 227% in the years up to 2025, let's look into where this growth will be derived from:
On-the-go water filtration bottles
Will experience a boost in demand from an increase in health, wellness and sustainability trends including the desire to reduce plastic waste and carry reusable water bottles.
At-home water filtration
At-home water filtration will become more popular due to increased awareness of water contaminants, increased urbanisation leading to heavy chemical sanitation of water supply and increased levels of microplastics in water supplies.
Will experience a results-orientated demand due to increased health needs of livestock and demand for better agricultural economics.
Source: Capital Markets Day Presentation, Water Quality Map of China
A key growth driver across the Water category will be demand from China in the subsequent years. The infographic above, shown in the Capital Markets Day presentation, depicts the water quality in Chinese regions as of 2019. Most of the densely populated areas such as Shanghai, Beijing and Hangzhou are all on the easterly side of China, which, as shown above, is typically presided by poor water quality. Increased understanding of this problem is expected to drive the Chinese water filtration market to $9bn per annum by 2025. This underlying demand for the Water category means the majority of the growth in this segment will be derived from market growth as opposed to product releases.
Whilst the segment is still very small, HaloSource, the commercial water treatment segment, has an almost endless list of commercial applications for future growth. The HaloPure technology derived from the HaloSource acquisition has the ability to not only treat raw incoming water but maintain an ongoing sanitised environment throughout the waterline. This application is designed for industries reliant on long-distance water lines with significant bacteria contamination such as livestock farming.
Additionally, this technology has also been identified for use in numerous other healthcare applications. 35 hospitals in China have indicated they will be adopting this technology for dental services and 28 hospitals for rinse water, with sales expected within 2021. The HaloPure technology is well-positioned to respond to the anticipated policy change in China, which will require regulated water for use in all livestock farms, hospitals and clinics.
Showing the possible upside potential from HaloPure, the underlying technology is currently being developed in a number of Strix's new applications. Strix was able to use this technology during the COVID-19 pandemic to create a disinfection facility at the Guangzhou factory, eliminating potential viruses or bacteria on the clothes of employees, creating a safe working environment during the pandemic.
Looking at the important financial metrics for Strix, we can derive a good picture of underlying performance. As alluded to earlier, revenue has grown moderately in the years to 2019, as the product mix has been highly weighted towards the mature Kettle Control business, which has lower growth prospects. Operating margin on an unadjusted basis has remained high, with the average over the five-year reporting period at 26%. Return on capital employed has been very high around the 80-100% mark, although it experienced a decline in 2019 due to the increased investment in the Chinese factory. Revenue is expected to grow almost 15% in 2020, primarily due to the Laica S.p.a acquisition. However, flat core revenues are still a decent performance. All in all, the financial metrics show a very solid foundation, underpinned by the mature and profitable Kettle Control market, which will provide a good platform to launch more growth-orientated ventures.
In terms of valuation, Strix trades at around 19 times 2021 expected earnings, a significantly higher rating than when Strix came to market at around 12 times earnings. This premium is arguably justified as the market builds a track record of Strix’s listed performance and warms up to the prospects of growth on the horizon. If Strix’s predictions are accurate, revenue is expected to double by 2025, and due to Strix’s very good level of profitability, earnings per share will likely be within the range of 20-25p per share. If the market continues to value Strix at 20 times earnings, going forward it would represent a valuation of 400-500p in 2025. This would represent a 45-80% increase in the share price alone, notwithstanding Strix’s dividends during the period (estimated at 10p per year going forward). Including 40p worth of dividends would give you a total return of 440-540p per share in 2025 with a 60-90% return expected over the next four years, which (at the low range) equates to a 15% return per annum, a vast outperformance of the British and wider stock market in a long-range period.
Strix has a very resilient business model, but also a good platform for growth in the future with very creative technologies with large addressable markets. I own a sizable position in the Kettle Control company for its resilient growth prospects and will likely be holding for some years to come.