Victrex looks past profit slump

Weaker demand from the auto, aerospace and energy industries for the speciality polymer that Victrex (VCT) manufactures, resulted in a 7 per cent sales volume decline during the year to September. Together with a restructuring programme, which involved cutting up to 100 jobs and resulted in almost £10m in exceptional costs, that caused operating profits to drop by more than a third. 

In the core industrials division, the US suffered the most substantial decline in sales volumes due to the fall in the oil price and activity levels. This market remains challenging, but management believes that the decline in the auto and electronics sectors has bottomed out. 

Yet while there has already been some progress in its end markets, management is pinning its hopes on an improving macroeconomic picture during the second half of the 2021 financial year for annual pre-tax profit growth. 

In an indication of that confidence, the dividend was reinstated as operating cash conversion came in at 101 per cent. As part of efforts to conserve cash, the UK debottlenecking programme, which was due to commence during this financial year, has been paused until clearer signs of a return in demand. 

Lower sales, under-absorption of fixed costs and inventory unwind post-Brexit are expected to eat away at the margin this year. However, the consensus forecast is for a return to pre-tax profit growth this year at £80.8m, up from £77.7m in 2020, although that is still behind the £106m recorded in 2019. With demand from multiple end markets set to remain challenging, we think the shares are one to avoid. Sell. 

Last IC View: Sell, 2,042p, 25 Jun 2020