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Gloomy sales forecast worries Victrex investors

Although inflationary pressures are easing, the maker of high-performance plastics is not out of the woods yet
May 9, 2023
  • Price hikes bring margin improvement
  • Growth dependent on macro recovery

Plastics firm Victrex (VCT) underperformed its own forecasts – as well as the expectations of analysts – in the six months to the end of March. The group’s sales volume of around 1,940 tonnes was down 14 per cent on the prior year, reflecting weakness in some of its end markets. 

Management said the company typically “sees a strong bounce back” once conditions in these sectors improve. But it also admitted volumes would likely decline by a double-digit figure for the full financial year. This explains why investors have taken an increasingly pessimistic view toward Victrex – with the shares falling by more than 8 per cent on the day. 

The question now is whether the present moment constitutes rock bottom for the company, or whether it still has further to fall. There are useful clues to be found in its own forward guidance. In February, management said it would be focused on modest revenue and profit growth for the current financial year. But it has now said that delivering pre-tax profit in line with last year’s will require “a step up in demand during the latter part of the second half, driven by macroeconomic conditions”. 

The gloomy economic conditions have mostly been observed in the electronics, energy and industrial end markets – despite growth in aerospace and automotive. At £84 per kilogram, the group’s average selling price was up 18 per cent on the same period last year, as it aimed to offset inflation in energy and raw materials. This, together with lower-than-expected power costs, lifted gross margins to 53.5 per cent from 49.4 per cent during the prior half. 

Victrex now expects gross margins to exceed expectations for the 2023 financial year. Meanwhile, it estimates that overall cost inflation (based on current energy and raw material prices) will be modestly lower than previously thought. 

Analysts at UBS noted that the company’s full year price/earning multiple of 17 is only slightly behind the long-run average. This “looks moderately expensive given the risk profile... from both macro trends and investment commitments ahead,” they wrote in a note.

The company has promised a double-digit increase in overhead investment to support its growth programmes – despite the negative impact on operating expenses. Ambition is commendable in this climate, but we feel the current valuation does not adequately reflect the risks it faces. A cautious hold. 

Last IC View: Hold, 1,669p, 7 December 2022

VICTREX (VCT)    
ORD PRICE:1,539pMARKET VALUE:£1.34bn
TOUCH:1,533-1,547p12-MONTH HIGH:1,953pLOW: 1,510p
DIVIDEND YIELD:3.9%PE RATIO:19
NET ASSET VALUE:559pNET DEBT:1.20%
Half-year to 31 MarchTurnover (£mn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
202216043.643.513.42
202316239.138.813.42
% change+1-10-11-
Ex-div:25 May   
Payment:03 Jul