Plastics maker Victrex hit by higher costs

High-performance plastics maker Victrex (VCT) went into its 2022 financial year with a fair amount on its plate in terms of costs. It was planning to increase capital expenditure and research spending at the same time as battling higher energy and raw materials prices.

Although demand for its products has held up reasonably well, with revenue up 9 per cent on a constant currency basis, it has faced “double-digit” cost headwinds after Russia’s invasion of Ukraine sent already high oil prices soaring. 

Victrex has been working to recover this. Its average selling price increased by £3 per kg to £71 per kg over the past six months, but its margins have been squeezed as it has incurred higher freight rates and “additional mobilisation costs” associated with opening a new manufacturing joint venture in China. The weaker pound has also had an impact, costing the company about £3mn in pre-tax profit. 

Victrex’s operating profit margin fell to 27.4 per cent, compared with 31.1 per cent a year earlier, and the company has warned that its gross margin of 53.1 per cent will be “slightly lower” in the second half, reflecting time lags in cost recovery and ongoing currency headwinds, which could cost £6mn-£8mn for the full year. 

“Our intentions remain to deliver a recovery in gross margin from these levels once existing headwinds subside,” the company said.

A 7 per cent drop in Victrex’s share price following its results announcement took the year-to-date decline to 33 per cent. Even so, the shares trade at more than 18-times broker UBS’s forecast earnings of 92.53p for the current year.

The ramp-up of activity around its planned factory in China “continues to carry risks” around cost inflation, UBS said. This, and other cost inflation means margins are likely to remain weak in the short term. Sell.

Last IC view: Hold, 2,430p, 6 Dec 2021