Victrex stockpiles and returns earnings

The ability of the polymer specialist to convert profits into cash flows will be critical over the coming months because the threat of not being able to import materials owing to a chaotic Brexit is identified as the group’s “principal risk”. It has, therefore, stockpiled raw materials in advance of any customs disruption, which could take its inventories for the current year above the £80m mark, compared with £69.3m in FY2018. That represents an additional draw on cash and it's worth noting that around £106m was used to meet dividend obligations in the year to September – that drain should increase over FY2019.   

Free cash flow came in around £119m, while net earnings point to a 1:1 cover ratio, so dividend support is somewhat tenuous. Given various challenges to trading conditions, including increasing raw material costs and the eventual nature of our exit arrangements with the European Union (EU), we think the group could struggle to match the 14 per cent rise in full-year operating profits. And there is no guarantee that the board will be as generous to shareholders this time next year.

Management expects flat profits this year, owing to a currency translation hit of between £6m and £8m, along with raw material and energy cost inflation. The problems don’t end here. Chief executive Jakob Sigurdsson acknowledged that “adverse currency, no expected volumes in Consumer Electronics and recent market softness in Automotive” will limit the group’s ability to “substantially improve” on its 2018 performance.

Broker JPMorgan Cazenove forecasts full year pre-tax profits of £124m for the March 2019 year-end, giving EPS of 127p, rising to £129m and 133p in FY2020.