Strix Group (LSE:KETL) is a penny share trading for just over 34p. Yet incredibly, it was changing hands for nearly 400p a little over four years ago. So the stock’s down 91%!
Despite this painful value destruction, one broker reckons the selling’s gone too far. On 28 November, German bank Berenberg gave the penny stock a 75p price target. While that was lower than its previous 85p target, it’s still roughly 117% higher than the current level.
Indeed, were it to come to fruition, buying Strix stock today could turn £5,000 into almost £11,000 over the next 12 months!
What does it do?
Now, AIM-listed Strix isn’t a company I follow closely. It only has a small (£79m) market-cap, so doesn’t get a lot of mainstream coverage.
What does Strix do? It’s a global leader in kettle safety controls — the bit that automatically flicks your kettle off when it boils. Hence the KETL ticker. The company also makes water filters, including boiling/chilling water taps, and other control systems.
As investors might imagine, the share price fell off a cliff towards the end of 2021 due to supply chain chaos caused by Covid, specifically in China, which is a key manufacturing location for Strix.
The company’s revenue has grown quite modestly, from £119m in 2021 to an expected £155m next year. This is despite the 2022 acquisition of Billi, a supplier of premium instant boiling, chilled and sparkling filtered water systems.
More worryingly, the company’s margins have been under pressure. Adjusted gross margin in the core Controls business was 36.3% last year, down from 41.5% in 2018. This concerns me, as it suggests the kettle control maker’s moat isn’t that strong or defensible.
In particular, it suggests Strix is struggling to pass rising costs on to customers. And when I think about what the company does, I immediately worry about low-cost copycats, particularly from China.
In a trading update on 26 November, the company wrote: “In the current period, the [Controls] division continues to experience higher activity from copyists, with several actions being taken to further protect Strix products and IP“.
Finally, the firm recently reported net debt of £70.3m. That’s almost the same as its market-cap, which means it’s too high. The company aims to address this with an accelerated debt reduction programme, including scrapping a dividend that was due to be paid this month.
Worth a punt?
The main attraction here is the stock’s valuation, which is what analysts at Berenberg highlight.
While the trading environment continues to be difficult for the Controls division, the successes seen in both Billi and Consumer Goods are positive, in our view. At a FY 2026 6.2x P/E…we believe Strix’s shares remain cheap. Berenberg Bank.
A forward price-to-earnings ratio of 6.2 is indeed dirt cheap, suggesting any positive news could send the stock sharply higher.
Next year, a new CEO will join. Hopefully they can get the Controls division clicking back into action again and improve margins.
However, this penny stock isn’t for me. The backdrop of tariffs adds uncertainty, while the constant need to defend market share against copyist manufacturers would worry me as an investor.
In my eyes, there are more attractive buying opportunities among UK small-cap stocks today.
