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Plastic costs are inelastic for Victrex

Company faces lag in recovering 'unprecedented' energy price hikes
December 7, 2022
  • Cash conversion ratio falls to 49 per cent
  • Commissioning of China plant should support margins

Victrex (VCT), the manufacturer of high-performance plastics used in everything from oil well seals to replacement knee joints, reported top-line numbers that were 5 per cent ahead of consensus estimates for the second half of 2022, but profit and cash flow both took a hit as it battled higher energy costs and rebuilt stocks.

Gross margin came in at 51.2 per cent, weaker than both last year’s 54 per cent figure and its high-50s target, which it blamed on “unprecedented energy cost inflation”, especially in the second half of the year. There was a lag in recovering some of this, although its average selling price was 3 per cent higher than last year, and its second-half average was up 4 per cent on the first.

There were other constraints on margins, including currency swings that meant statutory pre-tax profit fell by 5 per cent on a reported basis. On a constant currency basis, it increased by 2 per cent.

The company’s cash conversion ratio more than halved to 49 per cent as it ramped up working capital spend, which included a replenishment of stocks that had depleted during the pandemic. Its closing inventory balance increased by £16.5mn to £86.8mn. It expects this to increase to more than £100mn next year.

Capital expenditure is also expected to remain elevated at around £45mn-£50mn next year as a new plant in China is finally commissioned. This will have “an incremental impact on margin” in its current financial year as it ramps up operations.

The company is beginning to look beyond this phase, however, and said it is engaging with shareholders about returning available cash either through buybacks or special dividends. Last year, it paid a special dividend of 50p on top of a 59.6p full-year dividend. This year, the full-year dividend payment remains the same but its closing cash balance of £66mn “was below the threshold to pay a special dividend”, it said.

The company’s shares slipped by 5 per cent on the day and are down 31 per cent so far this year. They are currently priced at more than 17 times consensus forecast earnings, a good way below their five-year average of 21 times. Victrex's costs are likely to remain elevated in the short term, but the risks associated with its China operation have reduced and it has decent defensive qualities in terms of the diversity of its end markets. Hold.

Last IC View: Sell, 1,668p, 09 May 2022 

VICTREX (VCT)    
ORD PRICE:1,669pMARKET VALUE:£1.5bn
TOUCH:1,669-1,673p12-MONTH HIGH:2,540pLOW: 1,522p
DIVIDEND YIELD:3.6%PE RATIO:19
NET ASSET VALUE:562pNET CASH:£26.6mn
Year to 30 SepTurnover (£mn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
201832612812959.6
201929410510746.1
202026663.562.646.1
202130692.584.359.6
202234187.787.659.6
% change+11-5+4-
Ex-div:19 Jan   
Payment:17 Feb