Victrex struggles with volatility in end markets

Margins at polymer manufacturer Victrex (VCT) have been hit hard by soaring raw material and energy costs in the past few years. The group’s results for the 12 months to the end of September show there’s been some recovery on this front, although persistent weakness across several end markets continues to weigh on the stock. 

With volumes down 39 per cent, the value-added resellers (VAR) division was clearly a sore spot for the company. Destocking was a key factor in its underperformance, as supply chains adjusted to a structural reduction in demand linked to the global economic slowdown. Revenue in sustainable solutions was also down 14 per cent to £241.8mn.

In July, Berenberg analysts predicted that current weakness at Victrex would “continue for another two quarters” – which certainly appears to be the case. However, they also said volumes across the business would recover in FY2024 supported by a restocking drive in VAR and by “150 tonnes of extra capacity coming from the initial ramp-up of the new plant in China”.

Management expects limited increases in operating overheads in the current year, which should support further margin recovery. But it also warned that lower asset utilisation and start-up costs linked to the new facility in China would partly offset progress. 

Despite the dividend being maintained, the shares still fell 2 per cent on the day that Victrex released its annual figures – a clear indication that investors aren’t confident in its near-term prospects. The group is currently trading on just under 17 times projected earnings for FY2024, which we think looks a little bit pricey in the absence of an extended period of recovery. Hold. 

Last IC view: Hold, 1,539p, 9 May 2023