Business Strategy & Outlook:
U.K.-based Victrex is the creator of and dominant market leader in polyetheretherketone, or PEEK, a lightweight ultra-high-performance plastic that suits the most demanding applications in transportation, oil and gas, and electronics. It serves these industrial markets through its industrials segment, which accounts for around 80% of sales. The company has broadened applications of PEEK to healthcare, notably implantable spinal fusion cages. Healthcare sales are housed in the medical segment, which contributes the other 20% of sales, but has higher margins than the industrial business. Total market demand for PEEK is small, currently around 6,000 metric tons per year. Victrex has succeeded in its efforts to expand the market for PEEK, as evidenced by mid-single-digit volume growth at the company over the past decade. The market for PEEK has plenty of room to grow by capturing increasing demand for metal-replacement products. Indeed, Victrex believes annual demand for PEEK could ultimately grow to 80,000 metric tons, a reasonable view given that the market size for many specialty polymers is 2-3 times larger.
While PEEK has been off-patent for many years, competition has been benign with only a handful of suppliers entering the market. Competitive dynamics are evolving slowly. Solvay made a significant capacity expansion a few years ago, but this is the only company that has made real inroads into the market. There is room for both Victrex and Solvay to be major players without serious price competition. The company’s strategy is shifting to prioritize moving downstream into semi finished and finished products and specialty applications, in order to capture a larger portion of profits in the value chain. Currently, these products account for about 30% of sales. Victrex’s pipeline of downstream products under development could easily double current sales, but a material impact on group profit is probably several years away.
Financial Strengths:
Victrex is in excellent financial health. The balance sheet is managed very conservatively–possibly too conservatively—with no debt and significant working capital. However, this is a strategic decision to ensure customers have strong faith in the security of PEEK supply, because Victrex has historically been the only major producer. At fiscal end-2021, Victrex had a GBP 96 million net cash position. In addition, the pension deficit is modest. Liquidity is enhanced by a GBP 40 million committed bank facility, which was unused at fiscal end-2021.
Bulls Say:
- Victrex is making progress moving downstream in the PEEK value chain, which should help protect margins as the upstream business becomes more competitive.
- The company has several GBP 50 million sales opportunities in its medical development pipeline, which should invigorate segment growth in the long term.
- Given the company’s significant free cash flow and shareholder-friendly capital-allocation policies, investors have the potential to realize extra returns through special dividends.
Company Description:
Victrex is a British specialty chemicals company whose business is based predominantly on manufacturing and creating solutions using polyetheretherketone, or PEEK, an ultra-high-performance lightweight plastic. Around 40% of sales are generated in Europe, with Asia and the Americas contributing 30% each. The business has two segments. The industrial segment targets transportation, energy, electronics, and manufacturing, while the medical segment provides healthcare solutions for the implantable device markets.
(Source: Morningstar)
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