UK Edition
Questor: boring but essential safety devices make for high margins at Aim-listed Strix
Kettle control and safety devices may not sound exciting but they are important and that is what makes Strix, the leader in this niche field, an interesting stock, especially for income seekers.
Strix claims a global market share of some 40pc, thanks to its long-standing relationships with leading brands and the up and coming legion of Chinese appliance makers.
The world market is probably growing at a mid single-digit rate annually and China is a key component of that.
A common design means Strix can meet local rules via relatively simple modifications, so profit margins benefit from scale, and are not compressed by complex component and machine tooling needs.
In 2017, the company made an operating profit of £26.2m on sales of £91.3m for an impressive margin of 28.7pc. Strong patent protection should help to defend the company and its intellectual property against would-be providers of cheaply copied products.
The proceeds from last summer’s flotation, priced at 100p, substantially reduced Strix’s debt.
Interest cover last year was more than 35 times and cash conversion was good, so management felt able to pay a 2.9p dividend after just five months’ trading as a public concern.
The payout is expected by analysts to reach 7.7p in 2018, enough for a yield of more than 5pc with earnings cover of 1.7 times. That is likely to attract attention from income seekers prepared to accept the risks of investing in small, Aim-quoted stocks.
The combination of a forward price-to-earnings ratio of barely 11, a yield north of 5pc and a strong competitive position suggests Strix could be a worthwhile income generator for patient investors.
Questor says: buy
Ticker: KETL
Share price at close: 143.2p
Update: Cineworld
A solid trading update last month represented a good start to Cineworld’s year, especially as last year’s numbers offered a stiff basis for comparison.
Sales rose by nearly 7pc year-on-year, on a constant currency basis. Although eastern Europe and Israel slipped a touch and the UK was down by 2.1pc, America put in an excellent performance with a 10.2pc rise in sales.
This is particularly important since Cineworld has just sealed the £2.7bn takeover of Regal Entertainment in the US and should help ease lingering fears over the health of America’s cinema industry. A strong slate of film releases for the rest of 2018 could help offset the risk of a near-term blip in trading posed by the World Cup.
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In the long term, the company must show that it can improve margins at Regal following what could be seen as a risky, largely debt-funded deal, but a healthy overall cinema market will make that easier to achieve. A forward p/e ratio of 14 with a yield of nearly 4pc looks decent value and at least prices in some of the execution risks associated with Regal.
Questor says: hold
Ticker: CINE
Share price at close: 257p
Update: Ladbrokes bond
Gambling stocks have been volatile recently: unexpectedly stringent restrictions on high-margin fixed-odds betting terminals were followed by the potential opening up of the US sports wagering market.
However, the Ladbrokes Group Finance 5.125pc 2022 bond has been rock solid and has continued to provide welcome portfolio ballast for income seekers. Holders can draw particular encouragement from the trading statement issued by GVC on May 25. That company now owns Ladbrokes Coral, so its cash flow funds the 512.5p annual coupon, paid in two annual instalments.
Group sales rose by 7pc in the first five months of 2018 as 17pc growth in the online businesses more than offset a 5pc like-for-like fall on Britain’s high streets. Any further changes in UK betting rules must be watched but the 3.8pc yield to maturity looks well underpinned.
Questor says: hold
Ticker: LAD2
Share price at close: 104p
Russ Mould is investment director at AJ Bell, the stockbroker
The price of the Ladbrokes bond was originally stated incorrectly online as 257p