The European economic upturn failed to surface in 2014, yet in the main the chemicals sector once again proved resilient. Some shares even rallied throughout the year thanks to strong niche end markets, smart management strategies or mouthwatering bumper dividend payouts.
A 50p a share special dividend and a favourable outlook for a number of its end markets helped propel shares in Victrex (VCT) up by about 15 per cent. Exposure to consumer electronics may yield lower margins for the plastic specialist, yet it still offered welcome top-line growth in a period of economic uncertainty. Looking ahead, a rock-bottom oil price could also be beneficial, as Victrex sells into the aerospace market and manufactures polymers found on every modern car.
Johnson Matthey (JMAT) also has exposure to the car market through its very lucrative catalytic convertors business. Stricter legislation on fuel efficiency is expected to continue boosting earnings this year, but the shares trade on a high PE ratio, suggesting the potential is already priced in.
The other strong performer of 2014 was Croda (CRDA). Takeover speculation helped divert attention away from a mid-year profit warning and faltering demand for its once-thriving cosmetics business. Faced with stagnant demand, customers on the continent have reportedly been sourcing cheaper ingredients. Croda has been forced to restructure its operations in a bid to re-energise sales of its high-margin additives.
Synthomer (SYNT) has also been made to pay for its 80 per cent exposure to the troubled eurozone. That exposure, coupled with an unhelpful construction squeeze, knocked the company's market value back by a tenth during the year. Slower output growth in China has been a drag on global construction markets, to which Synthomer - formerly Yule Catto - sells paint additives. The sector remains depressed, but the company is at least in good hands under new chief executive Calum MacLean.
Choppy construction markets were also unhelpful for Elementis (ELM), which has its own paint business. The group has been thriving on the success of its personal-care segment and exposure to the US fracking boom, but the latter now is rapidly moving from boom to bust. Supplying additives for drilling is not an ideal premise for investment when the oil price is at a six-year low.
| Company name | Share price (p) | Market value (£) | PE ratio | Dividend yield (%) | 1-year performance (%) | Last IC view |
| Alent | 374 | 996m | 14.7 | 2.4 | 14.8 | Buy, 341p, 5 Sep 2014 |
| Croda International | 2,745 | 3.7bn | 21.3 | 2.4 | 13.2 | Hold, 2,167p, 23 Jul 2014 |
| Elementis | 289 | 1.3bn | 20.0 | 1.7 | 11.1 | Hold, 275p, 30 Jul 2014 |
| Johnson Matthey | 3,532 | 7.2bn | 20.3 | 1.8 | 5.3 | Hold, 3,279p, 21 Nov 2014 |
| Synthomer | 249 | 846m | 12.5 | 2.7 | -8.5 | Hold, 219p, 11 Aug 2014 |
| Victrex | 2,148 | 1.8bn | 22.7 | 2.1 | 14.7 | Hold, 2,026p, 10 Dec 2014 |
Favourites:
We continue to believe in the story at Alent (ALNT). The shares are up 13 per cent since our bottom-fishing buy tip (310p, 6 Feb 2014), yet still trade at a significant discount to peers. Since its demerger from Cookson, currency headwinds and tough European markets have held Alent back, but this could be set to change under new chief executive Andrew Health as the global electronics industry remains strong and the auto market picks up speed.
Outsiders:
Shares in Croda trade on 20 times earnings, despite two years of little top-line growth. Rumours of a takeover bid have boosted the share price in recent months, even as its European end-markets remain weak.
