Highly cyclical and with profits in freefall, few gave Vesuvius (VSVS) much hope when it was formed when Cookson split in two more than a year ago. Management thought different, and has been busy selling lower-margin operations and cutting costs. Demand for steel, on which the molten metal engineer depends, is also ticking higher. But the share price is up by nearly two-fifths since the demerger, almost wiping out the historical discount to the sector. Given forecasts for only modest growth, and reliant on further economic recovery, the current valuation is too aggressive.
- Trading outlook more encouraging
- Margins improving
- Shares overvalued
- End markets mixed
- Steel industry growth only modest
- Potential share overhang
After a tough 2012, there was a sense last year that the global steel industry had reached the bottom of the cycle. For Versuvius this increased optimism, coupled with improving margins and a £30m share buy-back following the sale of the precious metals business in March, fuelled a dramatic re-rating. The forward PE ratio went from 10 to 14.8, based on RBC Capital Markets estimates, which is only slightly less than the FTSE 350 industrial engineering sector on 16.2. And this is important, because since 2005 Cookson's shares have traded at a discount of between 10 and 40 per cent. Management action in the Vesuvius era deserves reward, but the current multiple is, in our view, far too generous given above sector-average gearing, cyclicality and order visibility measured in weeks.
And the recent equity market sell-off illustrates just how worried investors are about the slowing Chinese economy and the impact of tapering on emerging markets. World crude steel production grew 3.5 per cent last year, driven largely by China - up 7.5 per cent. China now accounts for almost half the total and is thought to generate about a fifth of sales for Vesuvius. However, the World Steel Association expects growth there to more than halve in 2014 - seasonally slower demand ahead of the Chinese New Year and pollution controls are already affecting production. Global growth in steel demand is unlikely to accelerate much this year, either, mirroring only flattish economic growth in more steel intensive emerging economies.
VESUVIUS (VSVS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 445p | MARKET VALUE: | £1.21bn | |
| TOUCH: | 444-445p | 12-MONTH HIGH: | 530p | LOW: 321p |
| FORWARD DIVIDEND YIELD: | 3.6% | FORWARD PE RATIO: | 14 | |
| NET ASSET VALUE: | 316p* | NET DEBT: | 31% | |
| *Includes intangible assets of £772m, or 282p a share | ||||
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p)† |
|---|---|---|---|---|
| 2011 | 1.69 | 157 | 38.7 | 21.8 |
| 2012 | 1.55 | 111 | 27.2 | 17.0 |
| 2013** | 1.51 | 116 | 28.6 | 14.5 |
| 2014** | 1.50 | 119 | 30.0 | 15.3 |
| 2015** | 1.55 | 130 | 32.9 | 16.0 |
| % change | +4 | +9 | +10 | +5 |
Normal market size: 5,000 Matched bargain trading Beta: 1.6 **RBC Capital Markets estimates, adjusted PTP and EPS figures †Both 2011 dividends and the 7.5p half-year dividend for 2012 relate to Cookson, prior to the demerger of Alent | ||||
When we last heard from Vesuvius in October, nothing much had changed. Conditions were stable and focusing on premium products had increased margins. For the steel division, which makes up about 60 per cent of group profit, everything hinges on global steel demand. And in the smaller foundry division, which supplies foundries with filters, pouring ladles, crucibles and furnace linings, an improved heavy truck and car market (40 per cent of divisional sales) is offset by poor conditions in mining and North American steel railroad castings.
Obviously, rising European car sales, if sustained, will help Vesuvius this year. And a return to growth in Europe, where the company has heavy exposure, will also help. However, it's unclear how many operators bought trucks ahead of new, more stringent Euro VI emissions legislation which came into effect on 1 January. This year could be quiet.
There is also the potential threat of a stock overhang to consider. Cevian, the Swedish hedge fund, owns 21 per cent of Vesuvius. It began stakebuilding at the end of 2011 and bought its last tranche of shares in April last year at prices between 325p and 350p. But with the Cookson demerger it agitated for done, and the shares re-rated, it may choose to exit. Cevian typically works on a three-to-five year timeframe, and with improvements in both margin and shareholder value at Vesuvius harder to come by, it may decide to sell. Co-founder Christopher 'The Butcher' Gardell told Reuters recently that Cevian would exit some holdings in 2014.
