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Morningstar | Victrex Reports Decent 2H, but 2019 Looks Tougher; Shares Fairly Valued

Narrow-moat Victrex reported decent second-half results. Profit before tax of GBP 65 million was up 6% over 2017 and broadly in line with our expectations. Second-half volume of 2,151 tonnes was in line with 2017,but slightly below our expectations due mainly to weaker demand from value-added resellers. The company declared a special dividend of GBX 83, above our GBX 60 estimate. After flagging potential changes previously, Victrex decided to retain its current dividend distribution policy. While 2018 was a strong year for Victrex, 2019 will start with several headwinds including an adverse currency impact, softness in the automotive market, and no expected volume in consumer electronics (5% of 2018 volume). We are likely to trim our 2019 volume growth expectations due to the lack of sales in consumer electronics but don’t expect to make a material change to our GBX 2,250 fair value estimate, given that we already assumed lower growth in automotive and a negative currency impact. At current levels, the shares look fairly valued.

The industrial segment had a good year. Energy and industrial was the best performer with 23% volume growth over 2017, including 19% growth in oil and gas. While we expected a strong year in oil and gas, growth beat our expectations. We think the recovery in oil and gas has largely played out. Hence, we have much more modest expectations for 2019. Electronics was also a strong performer in 2018 with volume growth of 19% over 2017. However, we see low- to mid-single-digit growth in 2019, given no volume expected in consumer electronics and a weak outlook in the semiconductor market.

The medical segment continued to tread water with flat revenue growth in 2018 on a constant-currency basis. The lack of growth reflects the maturity of the U.S. spine market and increasing competition from titanium spinal cages. While growth is lacking, we do not expect any material deterioration in this highly profitable business due to its strong moat.