Arguably the biggest disappointment in recent months in the Bearbull Income Portfolio has been the price performance of steelmakers’ supplier Vesuvius (VSVS). At 347p, its share price is now 42 per cent below the 12-month high it hit eight months ago. Sure, some of that decline is understandable since demand for steel is sensitive to global economic activity and the world went into 2022 burdened with concerns of slowdown. For reasons we know only too well, those worries have been transformed into dread of the worst depression in 50 years.
Even so, that doesn’t fully explain why the price drop has been so steep. Against the FTSE Industrial Engineering index comprising roughly comparable companies, Vesuvius shares have dropped by approaching 40 per cent in the past 12 months.
And, as the chart below indicates, something odd has been happening to the share price in relation to changes in global steel production. Vesuvius was one of two companies split out of Cookson, an industrial conglomerate, back in 2012 and – as per the chart – its share price performance since then has usually tracked changes in global steel production. Granted, its share price movements are much more volatile (and the vertical scales on the chart are adjusted for that) but that’s to be expected; production of steel is anchored to changes in total global output so even an annual change of a few per cent is a big deal. However, that tracking seemed to come to an abrupt halt in 2020. In 2021, global steel output rose – its 3.9 per cent increase was well above the average of the past 10 years – but Vesuvius’s share price began the decline that has accelerated in 2022. This has happened despite Vesuvius producing perfectly decent results for 2021 and management went into the current year “confident that the group will deliver a significant improvement in financial performance in 2022”.
True, the group’s bosses are likely to be more cautious when they update trading at the annual meeting in mid May. Even so, the share price decline seems to pay scant attention to the group’s long-term merits. When it was split out of Cookson, Vesuvius was supposed to be the boring half. Maybe, but it was – and is – a global leader in supplying the consumables, mostly ceramics, used in foundries for casting iron, steel and other metals. These products have a short service life and represent a small proportion of a foundry’s costs, yet play a vital role in raising yields. In other words, they are must-have purchases. That puts Vesuvius in a strong position. After all, global production of steel – approaching 2bn tonnes in 2021 – is not going away and Vesuvius’ customers are evenly spread across the industrial world.
It is for reasons such as these that I have ignored the stop-loss sell signal that was triggered some time ago. Sure, the group’s equity value was compromised by a £100mn rise in net debt during 2021 to £277mn, although that was mostly due to an acquisition. Besides, the group’s debt is well below the demands of debt covenants and, at 347p, the share price is a good 20 per cent below my best guess of where share value lies.
