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Questor: tie-up with Dyson is another attractive cog in the wheel for specialist plastic maker Victrex
Sir James Dyson continues to push boundaries. At the launch of his V10 range in March the entrepreneur boasted that his team had reinvented the cordless vacuum cleaner to have the suction power of a corded machine.
Cue explanations about hi-tech components that were smaller, faster and lighter than those that had gone before. And for the impeller – essentially the rotor at the heart of the machine – Dyson had used “polyether ether ketone (Peek) and carbon fibre composite, found inside high-intensity pistons”.
It was a disclosure that has had the City in a spin over Victrex ever since. Based a few miles from Blackpool, this FTSE 250 company is by far the world’s largest producer of Peek, a temperature-resistant engineering plastic with applications in the medical, electronics, aerospace and oil and gas industries.
Patented in 1978, Victrex still has the challenge of identifying new markets for its polymer, particularly where plastics can improve performance if used in place of metal parts.
Dyson’s adoption of Peek for its new turbine blades suggests that Victrex has found a useful new customer. Analysts at Credit Suisse, the bank, estimate that each blade takes 4g of Peek to produce, amounting to 60 tons a year.
If Dyson uses the new motor design for most of its devices, that would mean another 50-100 tons or 1pc-3pc of group volume growth over the next few years. It seems we are a long way from peak Peek.
However, sceptics at Barclays have queried whether the opportunity is entirely new, saying Victrex had announced that Peek was being used in Dyson goods as early as 2004. No matter. Over the past year shares in the company have lit up like the Blackpool Illuminations, rising by a third. It means the honeymoon continues for Jakob Sigurdsson, who shortly marks his first anniversary as chief executive.
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Analysts at Berenberg believe Victrex will grow annual volumes by at least 8pc for the foreseeable future, in line with the wider market for speciality polymers. Any upside depends on the array of projects it has invested in. Victrex is trying to move downstream with differentiated polymers and semi-finished goods.
That means higher manufacturing costs and perhaps lower average selling prices, but hopefully higher profits. It flags the potential for subsea oil pipelines, where there are discussions with Tullow Oil and others, as well as Peek use in car gears and dental implants.
There is competition in this market of course. To illustrate, Victrex supplied 900 tons of Peek to Apple in 2015 for a resin component inside the iPhone, when rival supplier Solvay had capacity problems. Solvay has since won the business back and Credit Suisse thinks Apple will be lost as a customer by 2020.
But it is throwing off cash. Victrex aims to grow the regular dividend in line with earnings, keeping cover at around two times. If there are no further demands to fund investment it will return half of its net cash to investors, subject to a 50p-a-share minimum.
Because of a record cash balance of £120m last year, there was a 68p-a-share special dividend on top of a 53.8p ordinary payout. By flagging in May that he would update on “distribution options” alongside full-year figures due in December, Sigurdsson set hares running that the payout ratio could go higher.
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This stock has much in common with Croda, a big exporter boosted by the pound’s weakness. The Yorkshire chemicals firm has invested heavily in innovation and supplies ingredients to beauty brands such as L’Oreal. Questor appraised Croda in December, highlighting its qualities but warning that its shares were too expensive by most conventional metrics. Yet the stock has risen by 20pc since then.
Victrex offers sector-leading returns and cash flows and has some momentum after a confident July trading statement. In addition, its modest size – in global terms – suggests it could make an attractive takeover target for a larger rival. However, the shares are trading at 24 times next year’s forecast earnings, a hefty premium to their 10-year average. For this reason, it is difficult to recommend buying at this point, although they remain attractive.
Questor says: hold
Ticker: VCT
Share price at close: £32.84