Stelrad Group plc (SRAD) — Investment Research Note

Executive summary

Stelrad is Europe's leading specialist manufacturer of steel panel radiators, holding #1 share in the UK, France, Netherlands, Belgium and Denmark with 24% aggregate share of the 22-country European market. The Group has spent 2023-2026 in a cyclical downturn (revenue -3.8% in 2025, -9.1% H1 2026) with subdued RMI and new build demand, but has offset volume declines through proactive margin management, driving adjusted operating margin from 8.7% (2022 pre-IAS29) to 13.5% in H1 2026 and contribution per radiator to £24.32 (H1 2026) from ~£18 in 2023. The single most important valuation point today is that management targets (>£21 contribution per radiator, 13% operating margin, >30% ROCE) have effectively been achieved at trough volumes — implying meaningful upside if/when European housing markets recover.

Fair value estimate

Range: 175p – 215p per share (implied market cap £223m – £274m), midpoint ~195p / £248m vs current 155p / £197m.

Methodology: hybrid of forward P/E on adjusted EPS and EV/EBITDA cross-check.

• 2025 adjusted basic EPS was 13.08p 2026-03 preliminary results. H1 2026 adjusted EPS was 7.43p (+16% YoY), pointing to a FY26 adjusted EPS of ~14.5p.
• Applying a 12-14.5x forward P/E to a normalized 14-15p EPS gives 168-217p; a mid-cycle EPS of ~16-17p (assuming volume normalization) at 12x supports the upper end.
• EV/EBITDA cross-check: FY25 EBITDA £44.1m, LTM £44.5m 2026-08 interim. At 155p, EV = £197m + £64m net debt (incl. leases) = £261m, or 5.9x LTM EBITDA. Peers typically trade 6.5-8x through-cycle → suggests fair EV of £290-355m, or 175-245p per share.
• Dividend yield: 8.09p FY25 dividend growing 4-5% p.a. = 5.2% at current price, comfortably covered ~1.6x by adjusted EPS.

Absolute upside: +26% at midpoint (155p → 195p); range spans +13% to +39%.

Sector context

Sector classification (Industrials / Construction & Materials) is correct — Stelrad is a specialist building products manufacturer supplying the residential and commercial heating value chain. Quality profile is above typical peers: market leadership, 29% ROCE, 1.29x leverage, and a differentiated flexible/low-cost Turkish manufacturing base. Growth profile is in line — a cyclical industrial with structural tailwinds (decarbonisation, larger radiators for low-temp systems, premiumisation) partially offsetting near-term volume weakness. Balance sheet is stronger than most cyclical building products peers.

Listed peers/comparables: Genuit Group (GEN.L, UK plumbing/water management), Ibstock (IBST.L, UK bricks), and continental peers such as Purmo Group (Finland, private) and Vaillant (private). No direct listed pure-play radiator peer.

Investment thesis (3 bullets)

• Margin resilience through the cycle with medium-term targets already delivered at trough volumes: adjusted operating margin has expanded from 10.8% (2024) to 11.6% (2025) to 13.5% (H1 2026) despite a 14.6% H1 2026 volume decline, driven by exit from a loss-making Italian contract, restructuring in Turkey/Denmark and price/mix discipline 2026-08 interim results. When end-market volumes recover, incremental drop-through should be meaningful given the largely fixed cost base.
• Undemanding valuation with 5.2% dividend yield and cash generation: at 155p the shares trade on ~12x FY25 adjusted EPS and ~5.9x LTM EBITDA. The 5% growing dividend is comfortably covered; leverage has fallen from 1.55x (2024) to 1.29x, and the group refinanced its £100m facility to Dec 2028 on tighter terms (SONIA/Euribor +1.5% vs prior +2.25%) 2025-03 preliminary.
• Structural tailwinds from heating decarbonisation and premiumisation: UK Part L regulations are driving larger radiators (average heat output +1.5% in 2025), UK combined electric + high-output radiator sales are up 33% p.a. since 2022, and premium panel penetration continues to rise (6.2% in 2025 vs 5.6% in 2022) 2026-03 preliminary. These support above-market growth as cycle normalises.

Key risks (3 bullets)

• End-market cyclicality with no near-term recovery visible: 2026 outlook explicitly notes "uncertainty around the timing of a wider market recovery" and volumes have declined for four consecutive years across UK/Ireland/Europe. If subdued RMI persists, the group's current margin peaks may prove unsustainable 2026-08 interim.
• Customer concentration and margin dependency on price/mix, not volume: one customer represents >10% of revenue 2026-08 interim note 5. Margin improvement in H1 2026 was partly driven by exit from a loss-making European contract and reduced sales in "lower-margin territories" — management explicitly warns that "favourable market and mix trends...are not expected to continue in the event of a wider market recovery" 2026-08 interim.
• Turkish exposure and FX / hyperinflation accounting complexity: Turkey is Stelrad's lowest-cost manufacturing base but the country has exited hyperinflation accounting only via a change in functional currency (Euro) on 1 Jan 2023; discount rates on Turkish pension of 29.6% and salary inflation of 24.6% 2026-08 interim note 13 highlight ongoing macro fragility that could disrupt production or margins.

Operating leverage

Stelrad has moderate-to-meaningful operating leverage. The group's own commentary confirms the mechanic: H1 2026 delivered 4.9% adjusted operating profit growth on a 9.1% revenue decline (14.6% volume decline), because contribution per radiator rose 20% to £24.32. That is not a fixed-cost-absorption story — it is a mix/margin story. In pure fixed-cost terms, the UK & Ireland segment illustrates the dynamic in reverse: revenue fell 4.0% but operating profit fell 6.3% because "the impact of adverse volumes on a stable fixed cost base has reduced the adjusted operating profit" 2026-08 interim. The gross margin was 35.1% in H1 2026 (up from 31.1% in H1 2025), suggesting a meaningful contribution margin on incremental units. Central costs of ~£4-6m p.a. and depreciation ~£11-12m p.a. are fixed. On a 10-20% revenue recovery from current trough (say £280m → £310-336m), one could plausibly see operating profit grow from £32.5m to £42-50m — a 30-55% profit uplift on a 10-20% revenue uplift. This is real but not extreme operating leverage; call it a driver score of 55-65.

Value-trap signals

• Revenue has declined every year 2023-2025 and continues to decline in H1 2026 (four-year down cycle).
• 2025 statutory operating profit collapsed from £31.4m to £17.5m on £14.9m non-cash Italian impairment (Radiators SpA acquisition, made in 2022, has clearly underperformed acquisition case).
• Meaningful customer concentration (>10% single customer).
• Controlling shareholder (Bregal) still owns significant stake, creating overhang risk.
• Note: dividend has grown 5% p.a. and balance sheet is de-leveraging — these are not classic value trap signals; the cheapness reflects cyclical timing rather than structural decline.

Earnings vs. expectations

Across the period, Stelrad has generally met or modestly exceeded market expectations at the profit level despite disappointing volume/revenue. The Jan 2026 trading update guided to c.£32.5m adjusted operating profit — delivered in line at £32.5m 2026-01 vs 2026-03. The Nov 2025 trading update guided £32-33m and 2024 delivered £31.5m "marginally ahead" of £30.8m consensus 2025-01. H1 2026 was "in line with expectations" per the AGM update 2026-05. The pattern is that of a management team that manages guidance carefully, sets expectations conservatively, and delivers or modestly beats — while consistently flagging volume weakness. Net: earnings-surprise trend leans slightly positive vs consensus but that reflects prudent guidance rather than genuine outperformance.

Conviction: 4 (high)

Anchors: (i) five years of clean, well-audited (PwC unqualified) IFRS financials with detailed segmental disclosure; (ii) the business model is simple to understand — steel radiators sold through established distributor relationships; (iii) valuation triangulates across multiple methods (P/E, EV/EBITDA, dividend yield) to a similar range. Caveats: (i) timing of end-market recovery is genuinely unknown, and the "mid-cycle" EPS assumption embeds uncertainty; (ii) H1 2026 margin peak may not be sustainable when volume mix normalises (management explicitly flags this).

Overall score rationale

The stock is fair-to-cheap with a solid dividend and quality business, but has essentially zero AI-receiver exposure — this is a steel panel radiator manufacturer. Given the user's strategy weights ~35% on AI-receiver alignment, this cannot score in the top bands regardless of other merits. Operating leverage is moderate but not the "long-tail" kind the user is after. Downside protection is strong (balance sheet, dividend, market leadership). Net: this is a fine defensive UK industrial income idea, but a poor fit for the AI-receiver / operating-leverage / long-tail-upside strategy specifically.