Victrex shifts more plastic but at lower prices

The 12 months to September brought an improvement of sorts for the prospects of plastics maker Victrex (VCT).

The Thornton Cleveleys-based group grew the volume of products sold by 25 per cent as business picked up in end markets such as electronics, energy and automotive when compared with a heavily pandemic-disrupted FY2020.

The average selling price for its products fell by 8 per cent, though, which the company blamed on a weaker sales mix as its lower-priced industrials business grew at a rate of about 16 per cent, compared with just 3 per cent for its medical parts division. That said, the latter had a stronger second half as more elective surgeries were carried out.

Victrex's cash holdings increased by £1.8m to £74.9m, with the bulk of the funds it generated during the year either being reinvested or paid out as dividends. On the latter score, management has seen fit to pay out a special dividend of 50p on top of its full-year dividend of 59.56p, increasing its total distribution for the year by 137 per cent.

Capital expenditure of £41.9m was up 68 per cent on last year but slightly lower than the company’s own guidance as some of its proposed investment into a manufacturing joint venture in China has been phased into its current financial year. As a result, this year’s capex could top £60m, the company said.

The balance sheet also benefited from a £28m unwinding of the amount of inventory held. Having stocked up European warehouses towards the end of last year as it prepared for Brexit-related upheaval, the group saw “no material impact” in trade between the UK and EU. Victrex expects to carry slightly higher stock levels of £70m to £80m this year as it prepares for the launch of its new Chinese factory and attempts to avoid supply chain vagaries.

The company’s research and development spend of £15.5m was 7 per cent lower than in 2020 and at the bottom end of its long-run guidance of 5 to 6 per cent of revenue.

The ongoing recovery of many of its markets means that sales volumes should continue their upward momentum, while progress on trials of new knee parts in India, Italy and Belgium moves another product line closer towards commercialisation. However, the stronger backdrop is also reflected in higher raw material costs which, together with bigger energy bills, rising capex and a higher level of research spending could dint short-term profitability.

While the bear case has lifted, the shares already trade at a premium to peers and just 5 per cent below the broker consensus target of 2,566p. Further upside potential looks limited. Hold.

Last IC View: Sell, 2,100p, 9 Dec 2020