Vesuvius treading carefully against an uncertain backdrop

Judging by a lowly forward rating of seven times forecast earnings, the market is rather more nervous about prospects for Vesuvius (VSVS) than modern Neapolitans. In a trading update, curiously delivered just three days ahead of its half-year figures, the company said that full-year trading profits will come in “towards the top end of the range of current analysts' expectations”.

Vesuvius, a specialist in molten metal flow engineering and technology, did add a carefully worded caveat as “there remains significant uncertainty as to the strength of end markets in H2 due to the ongoing geopolitical environment and potential macroeconomic weakness”. The warning applies to many other industrial companies and it’s reflected in the share price, down by around a third over the past 12 months.

The outlook may be uncertain, but at least the company made operational headway in the period under review. Vesuvius saw 2 per cent volume growth in its steel division due to its performance in Brazil, India, Vietnam and Turkey. This fed through to a 500 basis point improvement in the division’s return on sales to 13.7 per cent. The Foundry division also exhibited strengthening volumes in frontier/emerging markets, although performance has been held in check due to continuing weakness in automotive markets. Meanwhile, the integration of the Universal Refractories business is proceeding as planned.

Predictably, working capital demands have grown, not only due to improving business activity, but also because of the decision taken to build inventory to mitigate the risk of supply chain disruption.

Vesuvius chief executive Patrick André said that the record level of trading profit (up 74 per cent to £127mn) had been brought about by "the restructuring of the company’s manufacturing footprint" and continued investment in research and development. It is laudable that management strategy is predicated on long horizons. Unfortunately, near-term industrial prospects are far from certain. Back to hold.

Last IC View: Sell, 407p, 28 Feb 2020