Cube UK Report (24 March 2021) – Strong numbers from these midcaps

Cube UK Report (24 March 2021) – Strong numbers from these midcaps

Good morning, it’s Roland here with today’s Cube UK Report.

There are a number of interesting updates from our universe today. I’m hoping to cover the following companies:

  • Strix (KETL) – full-year results from the water control specialist
  • Bloomsbury (BMY) – another upgrade!
  • Keyword Studios (KWS) – full-year results

Strix Group

  • Stock data should display here.
Market cap £535m
RNS 2020 results
Writer disclosure No position

Strix floated on London’s AIM market in 2017 as a leading global supplier of kettle safety controls. That’s the part which makes your kettle switch off when it boils. Founded in 1951, the safety-critical nature of the firm’s products mean that Strix has accumulated plenty of intellectual property and generates high margins.

The obvious weakness – perhaps – was that this is a fairly mature market. Since its flotation, Strix has attempted to address its growth issues by gradually expanding into new areas, including through acquisitions. These include Laica (health and wellness sector) and HaloPure water purification technology, which is being rolled out to livestock farming customers in China.

Today’s results show a stable if rather flat performance in 2020. Here are some of the headline numbers:

  • Revenue down 1.6% to £95.3m
  • Pre-tax profit up 2.4% to £30.9m
  • Earnings down 2% to 14.9p per share
  • Net debt up 41% to £37.2m
  • Dividend up 2% to 7.85p per share
  • Operating margin: 28%
  • Return on capital employed: 31%

I don’t see too much to be concerned about here, apart from a lack of underlying growth. Strix’s profitability remains very high.

Debt rose last year to fund the Laica acquisition, but still only equates to 1x EBITDA. My reading of the cash flow statement suggests that underlying free cash flow remained stable last year, so I don’t have any concerns about the firm’s financial health.

Strix has paid a regular dividend each year since its floated and despite a strong run for the stock, still offers a useful 3% yield.

My view

I can see a lot to like in this business and to some extent regret not having bought the stock at a lower level.

My main concerns would be that efforts to expand and diversify will fail to generate the same kind of returns earned by Strix’s core kettle control business. In 2020, Kettle controls generated 84% of revenue and 92% of gross profit. However, both the Water Categories and Appliances segments were profitable, so I’m happy to give management the benefit of the doubt for now.

KETL shares currently trade on around 18 times earnings, with a 3% yield. Given the combination of low growth and high profit margins, I’d say this is probably a fair price. I wouldn’t mind owning this stock.


  • Stock data should display here.
Market cap £225m
RNS Further trading update
Writer disclosure No position

Harry Potter publisher Bloomsbury has upgraded its profit guidance for the year ending 28 February for the second time in two months. The group has reported “exceptional” trading in February. It seems that we’ve fallen back in love with reading real books in lockdown.

On 29 January, the company advised investors to expect profits “well ahead of market expectations”.

Today’s update advises us to expect “profit significantly ahead of upgraded market expectations”.

The upgraded expectations being referred to here are given as revenue of £171m and adjusted pre-tax profit of £14.8m. So we can expect more than this. Disappointingly, management don’t give any guidance about the likely extent of the beat, so we’re left guessing.

The only disclosure that is made is that net cash was £54m on 28 February, up from £44m in the interim results.

My view

CEO Nigel Newton rightly points out that no one yet knows how consumer habits will change as life returns to normal. The majority of exceptional growth during lockdown appears to have come from Bloomsbury’s consumer division, not its non-consumer (academic) business.

However, I see the non-consumer business as a good engine of medium-term growth and diversification.

I remain a fan of this stock, although I’m not sure I’d rush to buy the shares at their current levels.

Keyword Studios

  • Stock data should display here.
Market cap £1.8 billion
RNS 2020 results
Writer disclosure No position

Video game services provider Keyword Studios is another AIM stock that’s delivered stunning results over the last couple of years. The shares have doubled since March 2019.

Today’s 2020 results show that the group maintained its strong growth in a year when demand for gaming boomed.

  • Revenue up 14% to €374m
  • Adjusted pre-tax profit up 29% to €74m
  • Statutory pre-tax profit up 87% to €32.5m
  • Adjusted earnings up 25% to €0.693 per share
  • Statutory earnings up 99% to €0.303 per share
  • Dividend: 0p (2019: 0.58p)
  • Year end net cash €103m (2019: net debt €18m)
  • Statutory operating margin: 11.0%
  • Statutory return on capital employed:10.1%

What can we learn from these numbers? There are a few things I’d point out.

Adjusted profits: Keyword Studios is clearly a serial adjuster. Reported profits are roughly half the group’s adjusted profits. The usual reasons apply – the two largest were share option expense (€15m) and amortisation of intangible assets (€9m). Acquisition costs were also substantial, at €2.7m.

I’d argue that these are not adjusting items but a core part of the business. But even so, I think it’s fair to say that 2020 was a year of strong growth and cash generation for the business.

Dividend: Keyword Studios isn’t a big dividend payer, but the company has previously maintained a progressive dividend. I can’t understand why no dividend has been declared for 2020. Based on 2018, a payout would have cost perhaps €1.5m – surely affordable with more than €100m of net cash? A dividend is promised for 2021.

Profitability: Keyword Studios’ model of consolidating technical services into one umbrella company makes sense to me. But although growth has been strong, it doesn’t seem especially profitable. Operating margins and ROCE have averaged around 10% in recent years, with no apparent benefits from the group’s growing scale.

My view

Keyword Studios’ growth seems impressive, but I think much of this is already reflected in the share price. KWS shares now trade on 95 times statutory earnings, despite fairly average levels of profitability.

Although cash generation is good, regular acquistions carry price and execution risk. I’m not sure there’s much margin for error in the valuation.

I could see myself tempted by this stock at a lower level, but it’s not for me currently.

That’s all for today, thanks for reading.

As always, if you’ve found my comments useful (or not!), please use the thumbs up/down below to leave feedback.




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