Vesuvius still waiting for markets to heat up

End markets continue to be problematic for molten metal flow specialist Vesuvius (VSVS). After what it described as a “limited improvement” in the steel markets it serves during the first half of last year from the slump experienced in 2022, things took a turn for the worse again in the second half.

Across the UK and Europe, steel production fell by 7.3 per cent year on year and was even 5 per cent below the worst year of the pandemic in 2020. 

Production in China was stable, but much more of its output was exported, piling pressure on producers outside the country. Global production rates outside China, Iran, Russia and Ukraine fell by 0.7 per cent, following a 3.9 per cent decrease a year earlier, according to the World Steel Association.

For Vesuvius, however, price increases helped to offset lower volumes and only 7 per cent of a 12 per cent decline in its trading profit was attributed to business performance, with the rest down to currency headwinds.

Despite the lower profit, cash conversion improved and the company’s debt leverage remained low at 0.9 times even after £92.6mn of heavy capital expenditure (capex) investments on plants in China and India. The company therefore decided to launch a £50mn share buyback in December.

Vesuvius's desire to repurchase shares it presumably deems to be too cheap is understandable. Even after a 70 per cent increase from last summer’s five-year low, they trade at nine times forecast earnings and offer a dividend yield of 4.6 per cent. Yet with end markets remaining unsettled and capex this year remaining elevated – it is expected to top £100mn –  this is perhaps a fair assessment of the risks it faces. Hold. 

Last IC View: Hold, 437p, 3 Mar 2023