Victrex, originally a management buyout from ICI, has been a spectacular success for those who bought into its flotation in 1995. Variants of PEEK, its versatile plastic polymer, are used in thousands of components in the aviation, oil and gas and automobile sectors.
PEEK is the caviar of plastics. A kilogram of its granules costs an average of £63.80, up from £62.50 a year ago. The upside for Victrex is that the margins are some of the best in the chemicals industry; the downside is that customers look for cheaper substitutes.
That partly explains the 5 per cent slide in revenues from the core polymers division. The big disappointment in the year to September was the 29 per cent fall in volume demand from the consumer electronics industry, which uses the polymer for speaker diaphragms and some components in smartphones. The plunge in the crude price also hit demand from the energy industry. Victrex is pushing further downstream in an attempt to shake off its vulnerability to the commoditisation of polymers. It makes the resin for medical products such as artificial vertebrae used in several spinal injuries. In this smaller division, revenues grew by 1 per cent. Overall, however, group sales fell 4 per cent, while pre-tax profits dropped 6 per cent to £100.3 million.
The company has bold ambitions to push into other downstream areas, including dental, orthopaedics such as all-plastic knees and products for trauma, but the jury is out in these areas, which will require heavy capital spending in the meantime. Meanwhile, competitors such as Solvay and Evonik keep trying to chip away at its core market.
The shares rose 3 per cent yesterday to £17.58 as the company held the dividend and confirmed that it was comfortable with City forecasts for pre-tax profits this year of about £106 million. The apparent progress is largely down to the fall in sterling: 98 per cent of PEEK sales go overseas. Victrex has not benefited because of hedging, but the hedge falling away next year will lift forecast profits by an estimated £15 million.
One view is that Victrex would be going backwards but for a benign boost from the currency markets. After many good years, the company is perched on a valuation of 17 times. That is starting to look a little too generous for a company struggling to grow the top line.
MY ADVICE Sell
WHY Plastics increasingly commoditised, jury still out on downstream strategy
Ashtead Group
A strong first half has pleased Ashtead’s growing army of fans and boosted its share price. The plant hire group, which was but a tiddler a decade ago, is now in the top half of the FTSE 100, weighing in at an astonishing £7.8 billion.
Geoff Drabble, chief executive, is confident there is more to come, especially in the United States, which accounts for 90 per cent of its revenues. Statistics on project starts suggest that the construction boom in America is good for at least another 12 months, probably more.
A Trump administration should give it a further boost if the president-elect delivers on his promise for infrastructure spending. A corporation tax cut, another Trump pledge, could easily save Ashtead, which pays most of its taxes in America, $100 million a year.
The company is not as vulnerable to a construction downturn as in past cycles. Half of its revenues now come from other activities, from water pumping equipment to providing fencing for events such as Glastonbury. It is less laden with debt. But owning huge fleets of idle bulldozers and cement mixers is no place to be when the cycle does turn. Shareholders may need to be nimble.
MY ADVICE Hold
WHY Trump hopes tempered by age-old worry about a sharp turn in the cycle
On The Beach Group
Sometimes you come across a nonsense in a results statement so egregious that you lose faith not only in the accounts but also in the management that approved them. In its financial highlights on page one of its results yesterday, On The Beach claimed that it had moved from a loss before tax last time of £2.5 million to a profit of £16.9 million, a change it billed as a 776 per cent increase.
This is bonkers mathematics. By its crazy methodology, if the holiday operator had made a bigger loss last time, it would have had to report a smaller percentage increase in profits. Percentages don’t work when calculating a change from a negative number to a positive one. For On The Beach to quote one is either innumerate or plain unthinking.
The company says that the figure is “mathematically correct” and that its auditor KPMG insisted on the number because of accounting rules. If this is true, no wonder investors have dwindling faith in the accounting profession.
The company continues to prosper in its niche of offering beach holidays online to low to middle-income families, with none of the cost pressures of tour operators selling on the high street. Shareholders who boarded at the float last year have had a delightful flight, the shares rising from 184p to 265½p yesterday, up 19¼p during the session.
However, earnings-per-share growth is set to slow markedly this year, using percentages calculated on planet earth. A good moment to disembark.
MY ADVICE Sell
WHY Management confusion over basic percentages
And finally . . .
Senior executives at OneSavings Bank, and their spouses, continue to sell stock. Two executives, including chief financial officer April Talintyre, and the wives of two others have banked £2.57 million after selling. Their disposals come after a £929,000 sale in September by Andy Golding, chief executive, to meet a tax bill and an £81,000 disposal by Richard Davis, chief information officer, last week. The latest sales were done at £3.13. Investors were unfazed yesterday, pushing the shares nearly 8 per cent higher to 339½p.
