Victrex is not a household name, but all of us benefit from its major product, a high-performance plastic called PEEK. Lightweight and incredibly resistant to extreme temperatures and dangerous chemicals, PEEK has replaced metal parts on everything from aeroplanes, cars and mobile phones to medical implants and even food processing equipment. It's big business, and will be in the future, too. But the endangered eurozone and significant currency headwinds tell us it's time to dump Victrex shares.
- Exposed to high-growth markets
- Favourable operational gearing
- Heavy exposure to eurozone
- Adverse currency impact
- Very short order book
- Risk of competition
Last year, Victrex, part of ICI until a management buyout in 1993, made almost half its sales in Europe. It's the world's biggest market for PEEK, but was lucky to avoid a double-dip recession last quarter, placing a big question mark over volumes. Victrex is a high-margin business and earnings are hugely sensitive to any change in activity. Company guidance suggests first-half results out on 22 May will be fine, but destocking late last year cut first-quarter volumes by 15 per cent and will trim annual profits, so look out for any hint of a repeat. James Tetley, at broker N+1 Brewin, calculates that every 1 per cent change in volume moves earnings by 1.5 per cent. And the impact could be quite sudden as the order book is usually restricted to just a couple of weeks.
VICTREX (VCT) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,324p | MARKET VALUE: | £1.12bn | |
| TOUCH: | 1,324-1,327p | 12-MONTH HIGH/LOW: | 1,610p | 1,015p |
| DIVIDEND YIELD: | 2.6% | PE RATIO: | 17 | |
| NET ASSET VALUE: | 264p | NET CASH: | £72.3m | |
| Year to 30 Sep | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 141 | 55.0 | 47.8 | 18.3 |
| 2009 | 104 | 25.1 | 21.7 | 19.2 |
| 2010 | 190 | 74.9 | 65.1 | 25.0* |
| 2011 | 216 | 94.2 | 85.3 | 32.5 |
| 2012† | 214 | 90.1 | 79.6 | 34.0 |
| % change | -1 | -4 | - | +5 |
Normal market size: 1,500 Matched bargain trading Beta: 1.1 *Excludes 50p a share special dividend †N+1 Brewin estimates (earnings are not comparable with historic figures) | ||||
Exporting almost everything it makes is problematic, too. Sterling is at an eight-month high versus the dollar and up on the yen, but it's the euro that matters most to Victrex. The single currency has just hit a three-and-a-half-year low versus the pound. That alone could strip £5m off profits, more if Greece exits the euro. At current rates, we calculate the total currency hit for 2013 at about £7m.
Besides, Victrex isn't the only PEEK maker. Evonik in Germany and Belgium's Solvay took market share when the PEEK patent expired over a decade ago. True, not much, but now a Chinese firm claiming to be the world's second-largest PEEK producer is on the march. It's early days and quality could be an issue, but, if it undercuts European rivals, customers may begin to question their loyalty to Victrex.
