Victrex

[ADrunkenMarcus]

Victrex's results look quite decent to me. One of my top ten holdings.

http://otp.investis.com/clients/uk/vict ... sid=955270

Highlights:

• Strong core business* growth, fully offsetting lower Consumer Electronics
- Core business volumes up >15% reflecting broad based growth & new applications
- Total sales volumes up 1%
- Group revenue up 15%, constant currency revenue* up 3%
- Strong performances in Automotive, Electronics (ex-Consumer), Value Added Resellers, Energy

• Further progress in new product pipeline
- PEEK Gears supply agreement to major European car manufacturer starting in 2018
- Meaningful revenue of £1m+ for PEEK-OPTIMATM HA-Enhanced Spine product
- Medium term aspiration for 10-20% of sales from new products* (2017: 4%)

• Investment to underpin Polymer & Parts strategy
- £10m acquisition of Zyex PEEK fibres business to expand semi-finished products offering
- TxV Aero Composites joint-venture to develop differentiated Aerospace products
- £10m Polymer Innovation Centre now operational; support prototyping & new polymer grades

• Record cash generation supports strong shareholder returns
- Cash up 88% to £120.1m and operating cash conversion* of 124%
- Regular dividend up 15% to 53.80p (dividend cover 2.2x*), special dividend of 68.00p/share

The final dividend is actually up 18.55%.

Return on Capital Employed (using unadjusted earnings) averaged over 31% from 2000-16, while the operating margin averaged 36.5%.

Best wishes

Mark.

[ADrunkenMarcus]

It certainly has a good record to date. The compound annual growth in dividends (excluding specials) has been over 13% from 1995 to 2017. I am not sure we can expect it to continue quite so strongly, but it's a quality company and I think it is adaptable.

My initial purchase was on a 2.5% dividend yield in 2015, topping up at a 3.3% dividend yield in 2016. Currently 4% of my dividend growth portfolio.

Best wishes

Mark.

[ADrunkenMarcus]

It's bad when a company doesn't realise what it has. Still, if a separate company works then that's the way to go. The shares opened up 5% earlier and have now fallen. Possibly a top-up candidate for me since the company's regular dividend was increased more than I was expecting and the special was larger, too.

We do need more companies like this! I hold Rotork, Spirax Sarco Engineering, Renishaw and Kone (Finland) which all have their niche and have delivered very good returns. The first three are cracking, top quality British companies.

Best wishes

Mark.

[ADrunkenMarcus]

Hopefully there are some I've missed...

The industrial revolution, eh?

[ADrunkenMarcus]

It's certainly the case that the company has gone through a slower period in recent years. We see this in, for example, the ROCE which had its recent peak at almost 39% in 2011 and then fell to 22.4% as of this year's results. Operating margin also peaked in 2011 at almost 43%, falling to over 38% in the recent results. The lower figures seen this year for both measures are better than very many publicly quoted companies.

We knew that certain capital expenditures would be declining. In that context, I see returns to shareholders such as special dividends as entirely appropriate capital allocation. I would much rather that than empire building. It may well be that over time Victrex's dividend policy becomes more generous in terms of a greater proportional payout, as more return comes from dividend payments and less from growth.

Best wishes


Mark.

[simoan]

Are you guys looking at the same company as me? This was a poor result, spun to the positive max by management:

If you graph the turnover and net profit since 2014, its not exactly grown gangbusters has it?

If I pay a PE of 25 for a company I want the graph solidly heading North East, not bouncing around 100m for the last 4 years, blown by the currency winds.

I agree the results were neutral at best, hence the lack of share price reaction either way. They pretty much met expectations but nothing more. However, I'm not sure why you're being quite so negative or where you get a PE of 25 from? We know from yesterdays results that the historic PE was just over 20, not 25. And if you believe broker forecasts the 2018 PE is under 19. On a PE of 19 you could easily make a case for Victrex being fairly valued given the quality e.g ROCE, Gross & Op Margins, Free Cashflow, and Net Cash - you'll not find many companies with similar quality metrics on a PE less than 20, irrespective of how much they are growing the top line.

They say " 98% of our revenue is from outside the UK", so given a weak sterling environment, why are they up such a miserable amount on a constant currency basis?

if they have to pay for raw materials in USD or Euros, then this would offset any gain from revenues outside the UK. In a way, this is good because it is a natural currency hedge which in these strange times is no bad thing.

If we read deeper we see: " PBT in constantcurrency – removing the effect of the Group’s profit linked bonus scheme, which did not pay out in 2016 – was down approximately 2%, driven by the higher cost of manufacture..."

And the results were flattered further due to an unusually low capital expenditure : see p 5: "For organic investment, our expectations of medium term capital expenditure in the £25m-£35m per annum range are unchanged but in the short term, we anticipate this will now be closer to a £20m per annum level. Total capital expenditure for the year was £16.7m (2016: £25.9m).

So what? You can't have your cake and eat it - the special dividend is a direct result of the reduced Capex generating more free cash flow!

This is way overpriced currently, it hasn't delivered despite big tailwinds. Some may see it as poised for the future. But I am seeing falling electronics volumes and mature medical applications and not a lot else.

I don't agree it's way overpriced. In a market where many companies are way overpriced on any metric you care to choose, I'd say given the quality, Victrex is fairly priced on a PE basis and maybe underpriced on other metrics compared to many other companies. There are far worse places to have money parked currently than Victrex equity.

All the best, Si

[simoan]

Further to my above: Compare and contrast Victrex with say, 3M on a similar PE rating and yield.

OK, but let's first establish that on a PE and yield basis they are not that similar. Ignoring the special dividend, I make it that the yield is approx. 50% higher for Victrex and the PE is 20 vs 25 for 3M. So not really that close at all!

For my purposes 3M is a superior investment in this sector, with better risk/reward, due to its size and diverse range of products and income streams. I imagine the next ten years: 3M I see as likely continuing to compound steadily. Victrex? I dont know, probably positive but not as visible.

Who knows, maybe the likes of 3M or DowDupont may bid for Victrex? That would change things for sure!

Is 3M really that good? What little data I have shows that their sales are pretty stagnant and historic and forecast earnings growth no better than Victrex. I take your point about 3M being more diversified but looking at the numbers can't say it offers better value to anyone wanting buy one of the companies today. Even their StockRanks are the same!

All the best, Si

[ADrunkenMarcus]

[cross post]:
Victrex surprised me with a larger than I expected special dividend for 2018. Special dividends are forecast for 2019, 2020 and 2021 which would imply five years in a row of special dividends (including 2017 - the last one before that was 2014). I'm not sure that will happen if they have a need to make further investments, but they have a strong balance sheet.

ROCE has started recovering towards the high 20%s and the operating margin is good. I hope we will see the ROCE rise further to its historical levels in the 30%s as the investments they have made generate returns and their mega programmes make progress.

Sharescope tells me that, for the last ten years, Victrex has:

averaged 28.5% ROCE (return on capital employed);
averaged 16.9% CROCI (cash return on capital invested);
grown its ordinary dividend per share at 12.5% CAGR;
averaged 39.1% operating margin

They also show the free cash flow yield as 4.6%. The current dividend yield is 2.6% (on an ordinary basis).

As always, DYOR!

Best wishes

Mark.

[simoan]

[cross post]:
Victrex surprised me with a larger than I expected special dividend for 2018. Special dividends are forecast for 2019, 2020 and 2021 which would imply five years in a row of special dividends (including 2017 - the last one before that was 2014). I'm not sure that will happen if they have a need to make further investments, but they have a strong balance sheet.

ROCE has started recovering towards the high 20%s and the operating margin is good. I hope we will see the ROCE rise further to its historical levels in the 30%s as the investments they have made generate returns and their mega programmes make progress.

Sharescope tells me that, for the last ten years, Victrex has:

averaged 28.5% ROCE (return on capital employed);
averaged 16.9% CROCI (cash return on capital invested);
grown its ordinary dividend per share at 12.5% CAGR;
averaged 39.1% operating margin

They also show the free cash flow yield as 4.6%. The current dividend yield is 2.6% (on an ordinary basis).

As always, DYOR!

Best wishes

Mark.

Mark,

Thanks for waking this thread up - I can't believe it was a year ago I made some comments!!

I still hold and will be looking to buy some more once the situation around Brexit becomes clearer. There was a reasonably reassuring update on that in the recent results (they are the only European supplier of PEEK), and at least they commented in some detail on Brexit, unlike some other companies who seem to have their heads in the sand and are just hoping for the best! However, there is no doubt that a no deal situation would adversely effect the business.

As you say, in terms of the numbers, it doesn't get much better on the current valuation and the balance sheet is bullet proof with £144m in cash before paying the dividends.

All the best, Si

[ADrunkenMarcus]

As you say, in terms of the numbers, it doesn't get much better on the current valuation and the balance sheet is bullet proof with £144m in cash before paying the dividends.

We may get a chance to buy more at a bargain price if the current market turmoil continues!

Best wishes

Mark.