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Our TP is unchanged at 575p, based on a 1x 2025E EV/sales and EBITA margin correlation. We expect continued resilience to transition into growth and substantial drop-through, hence our continued Buy rating.
Vesuvius Plc
Foundry weakness continues, while Steel holds up Second half Group sales of GBP884mn were in line with Bloomberg Consensus, down at an organic rate of -2% YoY (Consensus at -1%). Within this, Steel sales came in -2% below Consensus and organic growth was -1% vs Cons. +1%. Foundry sales beat Consensus estimates by +3% and organic sales growth was -4% vs Cons -6%. Second half Group trading profit of GBP91mn came in +2% ahead of Consensus with margin of 10.3%, +30bps above cons (+6bps YoY; -10bps HoH). Divisionally, the Steel division beat Cons by +5%/+70bps. Foundry missed estimates by -9%/-80bps due to a difficult trading environment driven by double-digit declines in markets in EU+UK and North Asia and a high-single-digit market decline in North America. First outlook for FY25e implies cuts to Consensus The Company issued its first guidance for FY25e. Management notes that ''trading profit in 2025 will be at a broadly similar level to 2024 on a constant currency basis and including the contribution from the PiroMET acquisition. We expect that cashflow for 2025 will be significantly ahead of 2024, benefiting from our working capital focus and a more normalised level of capex.'' The Firms has set a mid-term Return on Sales target of at least 12.5% by 2028 and cumulative GBP400mn FCF target by 2027. The Company also expects to achieve at least GBP30mn of annually recurring costs savings in 2026 and has extended the cost reduction programme with an increase from GBP30m to GBP45m by 2028. Adjusting our numbers; TP down to 450p We update our forecasts to reflect recent trading and FX. Our target price is cut to 450p (from 500p).
Vesuvius has just published H2''24 results; key takeaways include... H2 Sales: H2 Group sales of GBP884m was in line with Bloomberg Consensus and declined at an organic rate of -2% YoY (Consensus at -1%). Within this, Steel sales came in -2% below Consensus and organic growth was -1% vs Cons +1%. Foundry sales beat Consensus estimates by +3% and organic sales growth was -4% vs Cons -6%. H2 Trading profit: H2 Group trading profit of GBP91m came in +2% ahead of Consensus with margin of 10.3%, +30bps above cons (+6bps YoY; -10bps HoH). Divisionally, the Steel division beat Cons by +5%/+70bps. Foundry missed estimates by -9%/-80bps due to a difficult trading environment driven by double-digit declines in markets in EU+UK and North Asia and a high-single-digit market decline in North America. Outlook: Vesuvius notes that ''trading profit in 2025 will be at a broadly similar level to 2024 on a constant currency basis and including the contribution from the PiroMET acquisition. We expect that cashflow for 2025 will be significantly ahead of 2024, benefiting from our working capital focus and a more normalised level of capex.'' They have set a mid-term Return on Sales target of at least 12.5% by 2028 and cumulative GBP400m FCF target by 2027. The company also expects to achieve at least GBP30m of annually recurring costs savings in 2026 and has extended the cost reduction programme with an increase from GBP30m to GBP45m by 2028. Cash: Adjusted free cash flow for FY24 was GBP61m (GBP128m in FY''23), implying a conversion rate from headline trading profit of c. 32% (c. 64% in FY''23). Net debt stood at GBP329.2m (GBP237.5m in FY''23). Dividend: Proposed final dividend of 16.4p bringing the FY dividend to 23.5p, (+2% YoY; Consensus at 23.3p). Conf Call: 9:00 am UKT. To access the call, register here. BNPP Exane View: In a nutshell, H2 sales were in line and trading profit margins came in +30bps ahead of Bloomberg Consensus where Steel was +70bps ahead and Foundry was -80bps below....
Vesuvius has released FY24 results which are slightly ahead of consensus expectations. It delivered robust trading, relatively, in weak end markets while gaining market share and delivering cost savings. The outlook is understandably cautious and management expectations of flat profits are c.5% below consensus. Results summary Resilient trading in a tough end market environment, driven by its differentiated offering, market share gains and pricing. FY24 revenues decreased 5.7% y-o-y (-1.8% underlying) to £1,820.1m (consensus £1,825.0m / INVe £1,818.8m) with lower volumes offset by pricing and market share gains. The adjusted operating margin contracted by 10bps to 10.3% resulting in operating profit of £188.0m (consensus £184.9m / INVe £185.5m), down 6.2% y-o-y (-0.2% underlying). EPS decreased 7.2% to 43.3p (consensus 41.9p / INVe 42.0p), and the dividend is increased 2.2% to 23.5p (consensus 23.1p / INVe 23.3p). Net debt/EBITDA increases to 1.4x (from 0.9x). Outlook Given continued weakness in Steel and Foundry markets, uncertain recovery timing and geopolitical volatility, management remains cautious. It currently anticipates FY25 trading profit at a broadly similar level to FY24 on a constant currency basis and including the contribution from the PiroMET acquisition, while FY25 cashflow will be significantly ahead y-o-y, benefiting its working capital focus and a normalisation of capex. Targets Understandably, management is now aiming to achieve its RoS target of >12.5% by 2028 and to deliver its cumulative £400m free cash flow target by 2027 – both set for 2026 at its CMD in November 2023. This is partially dependent on a return to normal end market conditions and supported by a £15m extension to its cost reduction programme – now £45m by 2028.
Resilience against a tough backdrop – Despite the challenging environment, our confidence remains strong for when volumes return, coupled with proactive capital allocation. We maintain our 575p TP and Buy recommendation.
We are more positive on Coats, Halma, Spectris and Spirax Spirax is our highest conviction pick. While we expect an inline print and outlook message we think the details should enthuse. We expect strong exit rates from ETS, a solid margin beat at W-M and positive commentary to all support a further re-rating as Spirax continues to make up lost ground. We like Halma for the upside to H2 profit and the upgrades a guidance message could catalyse. Spectris for order rates that will likely surprise positively and commentary that should reassure. Coats, as we think the messaging from the new CEO on the operational strategy should be taken well, alongside the solid H2 print. We are more cautious on IMI, Rotork and Weir Group Weir Group is a key idea for potential miss this quarter. We think orders will disappoint and revenues will miss what Consensus has implicitly baked into Q4, by a wide mark. We think this will drive an H2 profit miss and a LSD-MSD cut to FY''25 expectations. Given the stock''s strong run, we think this will be hard to digest. We feel uncomfortable with profit forecasts at IMI where we think Life Technology will drive a miss and believe management is cautious in respect to ethe likely development of all business lines outside of Process Automation. We think order expectations are slightly too elevated at Rotork for this year and next. We think a slight miss in H2 and communication on the call will lead analysts to reappraise their forecasts, catalysing downgrades to earnings. We downgrade Weir to Neutral on near-term earning risk (from Outperform) We have been bulls of Weir for the last few years. While we remain believers in the medium-to-long term opportunity we think the very near term (2025) will be more challenging. We think Consensus estimates look much too elevated with respect to H2''24/FY''25 where we see a dual risk from order expectations being slightly too rich and revenue forecasts not being supported by the order forecasts...
VSVS SMIN IMI SXS WEIR HLMA ROR SPX COA
Vesuvius has released an in-line trading update highlighting robust trading in difficult markets, that end markets remain weak but it gained market share, launching a second share buyback for £50m showing confidence in future cash generation, and FY24 to be in-line with market expectations. Trading Resilient trading in a tough end market environment driven by its differentiated offering, market share gains and pricing. Steel markets remain subdued and continue to weaken while growth rates in India and WWMEA have slowed, as anticipated, while Foundry markets have remained weak, excluding India. Overall, Steel was in-line with expectations and Foundry slightly weaker which was offset by cost actions. The cost saving programme is on-track. Acquisition Vesuvius acquired a 61.65% stake in Piromet AS, a Turkish business for £26.2m on 15 Nov. Completion is subject to the typical regulatory approvals and is expected to occur in Q1’25. The acquisition will strengthen its Advanced Refractory business in the fast-growing EEMEA region and will also allow it to leverage Piromet's expertise in robotics and gunning. Outlook Steel and foundry markets are expected to be subdued for the rest of the year with the timing of recovery uncertain. Management is mitigating this with further cost actions and now expects trading profit for FY24 to be slightly below FY23 on a constant currency basis (previously similar to FY23 £200.4m), but this is in-line with current market expectations (INVe £192m, consensus £189m.). Management remain confident in the attractiveness of the long-term global steel and foundry market fundamentals and continue to focus on the execution of the company’s self-help measures, which will leave it well placed when end-markets improve.
Our TP is unchanged at 575p and remains based on a 1x EV/sales, EBITA margin correlation of our 2025E forecasts. We reiterate our Buy rating.
Vesuvius has released a trading update covering the first four months of H2; key takeaways... Trading in the period: Detail in the release is light, with Vesuvius speaking of a sequential (i.e., first four months of H2 relative to H1) deterioration in demand in its markets. The deterioration in Steel does not come as a surprise given steel production data (Global ex. China steel production c-1% YoY; c-4% QoQ in Q3''24) while within Foundry, Europe continues to surprise negatively, with market demand declining significantly sequentially as well as YoY. Amid weak market demand, Vesuvius continues to point to market share gains in both its Flow Control and Foundry businesses and continued net positive price. Headline profit appears to have come in slightly below prior management expectations driven by market related weakness in the Foundry division despite more support from cost saving measures. Outlook: Vesuvius now guides headline trading profit that is slightly below FY''23 on a constant currency basis where it previously anticipated modest growth. However, it seems that Consensus is already there with-it modelling headline trading profit of GBP188m which we believe reflects -2% constant currency decline. It should be noted that cost savings benefits are now expected to amount to GBP9m where previously Vesuvius expected GBP6m of benefits. Launching second tranche of buyback and a small bolt on: Vesuvius announces a second programme for a further GBP50m to be transacted over the next six months (5% of market cap). Alongside this it announces a small bolt on acquisition, with it acquiring as 61.65% stake in Piromet AS, a Turkish business for EUR26m. The acquisition is argued to strengthen its Advanced Refractory business in the region of EEMEA and will also allow Vesuvius to leverage Piromet''s expertise in robotics and gunning. BNPP Exane View: Vesuvius has cut its guidance but only to a level where Consensus already sits today. Some could argue we still...
Steel, particularly Flow Controls, is performing well against a tough backdrop. This underpins the medium term for a 12.5% margin for the group. Vesuvius should be a strong performer into recovery hence Buy.
Vesuvius has released in-line H1 results. Key highlights include: H1 trading in-line with expectations, end markets remain weak and this is expected to continue through H2, and FY24 profit is now expected to be only slightly ahead of FY23 – this is c3% below consensus expectations. H1 results summary H1’24 revenues decreased 5.9% y-o-y (-2.0% underlying) to £936.5m with lower volumes offset by pricing and market share gains. The adjusted operating margin contracted by 10bps to 10.4% resulting in operating profit of £97.2m, down 7.4% y-o-y (-0.9% underlying). EPS decreased 11.2% (-2.9% underlying) to 21.8p and the interim dividend is increased 4.4% to 7.1p. Cash performance was good despite underlying trading and net debt was £315.2m (vs £237.5m in FY23) reflecting seasonal cash flows and the share buyback. Outlook Management no longer expects a significant improvement in end markets in H2, with most external forecasts predicting end market recovery being postponed to 2025. Accordingly, it now expects FY24 headline trading profit to be only slightly ahead of last year on a constant currency basis - FY23 trading profit was £200m reported and is £192m retranslated at H1 2024 FX rates (consensus £200m / INVe £202.5m). Confidence remains in achieving its medium-term objectives: 12.5% margins by 2026 and £400m of free cash generation over the next 3yrs.
The Steel performance is good, but the Foundry trading headwinds move the recovery into 2025E. The medium-term targets remain unchanged, so today is frustrating, but it is a delay rather than structural. Reiterate Buy.
What is the set-up heading into Q2 results? Consensus has left its expectations largely unchanged when compared to the pre-Q1 results period. Macro indicators (PMIs, Industrial Production) have remained soft since while some industrial companies have warned (MSC Industrial, Lincoln Electric and in the UK, Spectris). This has injected nervousness, as some UK Cap Good companies have a greater H2 leaning embedded in their guidance messages. Within our UK coverage, we think most of our companies will reiterate guidance except for Spirax, who we think will cut. While Cons is still not reflecting this, our conversations with investors and the underperformance in the stock YTD suggest the market is already largely pricing this risk in. So, where does risk-reward look more interesting? We like Coats (+) and prefer IMI (=) over Rotork (=) into H1 results We think IMI is likely to deliver an organic sales growth beat in H1 which is driven by its Process Automation, Transport and Climate Control business which should offer some reassurance to investors given industrial momentum was waned elsewhere. We are also positive on Coats into H1. We are more cautious on Rotork. While we think it will deliver a PandL beat, we think order development will be stable. We think this will act to dampen sentiment and could drive Consensus to cut H2 numbers, meaning that even though we expect an H1 beat, FY''24 est. may be trimmed We raise Spirax to Neutral (from Underperform); TP unchanged at 8,300p In March we highlighted risks around Spirax''s FY24 guidance (A de-risking opportunity missed). A guidance cut at H1 and subsequent consensus rebasing (c.-5%e to FY''24/25 adj. op. profit) are still likely, in our view. But the stock has underperformed and, on our estimates, now trades in line with longer term averages (c.20x 12m fwd EV/EBIT). So the downside risk appears to be somewhat priced in. Further notable underperformance likely requires expectations to be reset by a...
VSVS SMIN IMI SXS WEIR ROR SPX COA
Vesuvius'' Indian operations have grown significantly over the last decade... Vesuvius'' Indian sales/profit have grown strongly over the last decade and we estimate now account for c11/18% of Group sales/profit. Facing a strong market outlook (c9% steel production CAGR out to 2030) Vesuvius India is investing heavily. As a result of market growth and internal initiatives we think Vesuvius'' Indian Steel business could actually deliver an 18% sales CAGR out to 2030. While this will have growth implications for the group (c300/400bps accretive to Steel''s organic sales growth from FY''23-26 / FY''26-30) it will also have implication for how its Indian subs are valued. ... and so has their valuation implying Vesuvius ex India only trades at 4x EV/EBIT Vesuvius'' somewhat overlooked Indian operations while fully consolidated are also separately listed with Vesuvius India/Foseco India up 125% and 60%, respectively, in the past year. As a result, Vesuvius'' stake in these assets is equivalent to c61% of its market cap (from c10% just two years ago). We think this sharp rally, and thereby the implicit de-rating of Vesuvius ex India (which we estimate trades at 4x EV/EBIT) has gone largely unnoticed. Nevertheless, the more interesting question to consider is what happens next, and what causes the investors to care - after all, there are other instances where Indian listed assets account for a material share of a parent company''s market cap and the ''stub appears cheap''. How does Vesuvius unlock value in India? The less drastic, but also most likely option is that Vesuvius sticks to its strategy. With greater intensity of communication and good execution, it will increasingly be viewed as an Indian play, particularly as India is a significant tailwind to the Group. This should support a re-rating. However, even if it does not, we think it is unlikely that Vesuvius ex. India derates further from the implied 4x EV/EBIT today. Should the market refuse to recognise the...
Vesuvius has released an in-line trading update, the key highlights of which are: trading in-line with expectations, end markets remain weak but it gained market share, and FY24 guidance unchanged. Overall, we would expect little to no consensus change and there may be some relief that it has held FY expectations. Current trading A 4M update showing resilient trading in a tough end market environment driven by its differentiated offering, market share gains and pricing. Steel markets remain subdued, excluding India and EEMEA, as anticipated, while Foundry markets have remained weak, again excluding India, and particularly in Europe and North Asia. The cost saving programme is on-track, with a target of £30m annualised cost savings by 2026, with at least £3m delivered in FY24 and an exit run rate of £10-15m by the end of 2024. Outlook There was a brief outlook statement, with management commenting that the resilience of the business gives it confidence on delivery of FY24 expectations. We note the medium-term guidance, communicated at the FY23 results, is that fundamentals for its end markets are strong and management reiterated its objectives of achieving 12.5% margins by 2026 and £400m of free cash generation over the next three years. Next catalyst: H1 results scheduled on 1 August 2024.
Our TP remains 700p, based on a conservative 1.0x EV/sales, EBITA margin correlation on our 2024E numbers. It is not a stretch target. Buy.
What is the set-up heading into Q1 trading updates? Following FY''23 results, Cons estimates have come down, but this has largely reflected FX. On an underlying basis, FY sales and profit expectations have not moved by much, with Spectris and Spirax seeing the most meaningful cuts (c3/2% organic respectively). Performance YTD has been relatively benign with UK Cap Goods broadly flat (wider sector +4%). Valuation for most companies remains undemanding when compared to their respective trading ranges (c10% discount to L10Y and 2015-19 averages) except for Spirax, which screens richly for the earnings risk we see. Not the non-event it is usually perceived to be? With very few numbers and no financial accounts disclosed, Q1 trading updates are not usually seen as significant catalysts. However, we believe this year may be somewhat different. What we find interesting is that, in arriving at its largely unchanged FY''24 organic assumptions, Cons for many companies has adopted a different shape for its forecasts. It has cut H1 expectations and revised H2 expectations higher. However, for some companies where exit rates out of ''23 were softer, we think these H1 cuts have not gone far enough. Q1 trading updates may be the catalyst for further cuts. We explore this dynamic in detail within and conclude that the implied sequential growth Cons models at IMI (Industrial Automation and Climate Control) and Spirax (Steam) are too rich. Despite the optics, risk to H1 expectations at Spectris may be lower than perceived. How do we view risk-reward at Q1? We think risk-reward into Q1 is negative at IMI and Spirax, where we think Cons has missed weaker exit trends out of ''23 and models too rich of a growth in the early part of the year. Risk-reward appears positive at i) Rotork, where we think the message on organic revenue growth will imply upside to H1 Cons expectations; ii) Weir Group, where we expect encouraging sequential order trends and iii) Coats, where we...
We increase our TP from 600p to 700p. This is a function of moving our 1.0x EV/sales, EBITA margin correlation onto our new 2024 forecasts. This is not a stretch target and we reiterate our Buy recommendation.
Vesuvius has released resilient FY23 results. Key highlights include: in-line results (c4% beat at the operating profit level), resilient performance driven by market share gains with good cash performance, further cost savings by 2026 (£30m), FY24 outlook points to continued market outperformance. FY23 results summary Robust trading in a tough end market environment driven by its differentiated offering, market share gains and resilient pricing. There has been a general slowdown in Foundry markets outside of India, most notably in Northern Europe, while steel markets outside of India are also softer. FY23 revenues decreased 5.7% y-o-y (-3.1% underlying) to £1,930m (consensus £1,953m / INVe £1,951m) with lower volumes offset by pricing and market share gains. The adjusted operating margin contracted by 70bps to 10.4%, resulting in operating profit of £200.4m (consensus £192m / INVe £192m), down 11.8% y-o-y (-6.7% underlying). EPS decreased 17.3% to 46.7p (consensus 45.9p / INVe 45.7p) and the dividend is increased 3.4% to 23.0p (consensus 22.9p / INVe 23.3p). Cash performance was good, despite underlying trading, and net debt was £237.5m (vs £255m in FY22 – consensus £246m / INVe £239m), representing 0.9x EBITDA. Outlook There was little on outlook other than it will continue to outperform its underlying markets – we expect steel and foundry markets to remain subdued through 2024. The medium-term fundamentals for its end markets remain strong and management reiterates it objectives of achieving 12.5% margins by 2026 and £400m of free cash generation over the next three years.
We are leaving our 600p TP unchanged for now but our confidence in the delivery of the 12.5% margin grows despite the minor adjustments to 2024E. We reiterate our Buy rating.
How are stocks set-up heading into results? The Cap Goods sector is up c8% over the last three months with the worst performing stocks in our UK coverage roughly flat and the best performers up c20%. Over that same time, Cons. estimates have hardly budged. The only exceptions are Spirax-Sarco (where Cons. has made steep cuts to organic growth and margin forecasts) and Coats Group (where Cons. has cut its organic sales growth assumptions). Valuation for most of our coverage appears undemanding when compared to their respective trading ranges (L10Y average; 2015-2019 average; c10/5% discount on average) again except for Spirax (-), which screens as being valued quite richly for the earnings risk we still see. What do we expect out of results? We think almost all our UK Cap Goods companies will be able to broadly meet Cons. earnings expectations for the reporting period in question except for Halma, which we expect to miss. Spectris and Vesuvius are both likely to deliver c4% H2 adjusted profit beats. Of course, more weight will be placed on the outlook messages that our companies will provide. Again, we think in most cases 2024 outlook messages will be supportive of current expectations. Exceptions include Spirax, where we believe guidance could catalyse another downgrade at Watson-Marlow and ETS, and Weir Group where we believe messaging may lead to Cons. modelling a slightly higher margin for 2024. How do we view risk-reward? We think risk-reward is negative for Halma (=) and Spirax (-) and Smiths (=). We think Halma''s trading update will catalyse Cons. downgrades as the margin recovery in Environmental and Analysis is scaled back. We expect Spirax''s guidance to call into question the top line recovery Cons. models for W-M and the margin progression modelled for ETS. At Smiths, we expect the print to trigger H2 downgrades as Cons questions the HoH growth modelled at Flex-Tek and Interconnect. We think risk-reward is positive for Weir (+)....
This is a progressive announcement that moves the Vesuvius investment proposition on by several steps. We maintain Buy and our 600p TP.
We maintain our Buy rating and 600p TP. Our TP is based on a 1x EV/sales, EBITA margin correlation using our 2023E forecasts. In our view, it is a stepping stone to a more substantial level as the recovery potential and 12.5% margin target become realities.
Vesuvius has released a robust trading update. Key highlights include resilient performance driven by market share gains, good cash performance, FY23 expectations maintained. Current trading Robust trading driven by its differentiated offering, market share gains and resilient pricing despite markets weakening since H1’23. There has been a general slowdown in Foundry markets outside of India, most notably in Northern Europe, while steel markets outside of India are also softer. H2 cash generation has been good, driven by working capital reduction, and FY23 net debt/EBITDA is expected to be c.1.0x. Outlook This resilient performance gives management confidence that it will meet FY23 expectations despite weaker market conditions compared to the first half of 2023. Notwithstanding this excellent performance, there needs to be some form of market recovery next year in order not to put pressure on FY24 consensus estimates. Medium-term fundamentals for the company’s end markets remain strong and Vesuvius should continue to outperform relatively. Next catalyst A CME on 16 November – providing an in-depth insight into the Group’s end markets and its business strategy. This event will be hosted by Patrick Andre, CEO, and Mark Collis, CFO, with presentations from the divisional presidents.
The Group has continued to demonstrate resilience, in the face of weaker than expected demand in both divisions in H2, helped by resilient pricing and continued market share gains. Although there are few signs of a sustained recovery in markets outside of India, we expect the recent capacity expans
Estimate changes: Vesuvius (VSVS.L, Price 402p - Buy - TP: 525p)
H1 margin surprised to the upside driving a 10% profit beat Group sales came in modestly below Vis. Alpha expectations (-1%) with Steel declining at an organic rate of 6% (Cons at -4%). Given that our VSVS weighted Steel production series was down 4% and pricing was positive (c4%) this implies that Vesuvius lost some market share (concentrated in Advanced Refractories). Foundry sales grew at an organic rate of 3% (Cons at 1%) despite a negative impact from destocking which is expected to moderate. Group profit came in 10% ahead of expectations as margin (10.5%; -200bps YoY, +80bps HoH) came in 110bps ahead of expectations. The pricing resilience that Vesuvius spoke to was evidenced in the profit bridge, with net-price mix acting as a GBP11m YoY tailwind (and we estimate perhaps c15m HoH). Vesuvius'' outlook message implies 3-5% upside to Cons'' FY''23 profit expectations... Vesuvius on the conference call noted that it expects volume to remain flat HoH. FX headwinds and under-absorption of fixed costs should act as a c.8/5-10m headwind respectively HoH, while one needs to add back the GBP3.5m of one-off cyber costs incurred in H1. This leads to a H2 profit number of c.90-95m, and a FY profit number of GBP195-200m which implies 3-5% upside to Cons expectations. ...However, guidance appears cautious and risk to ''24 may be lower than perceived The fact that Vesuvius is not baking in any recovery in volumes (despite destocking headwinds easing) and no benefit from net-price (despite the healthy contribution in H1 and some cost items continuing to move down) lead us to conclude that it is too cautious with its outlook. We expect a similar margin performance in H2''23. Further, benefits from growth capex investments should flow through and act as a meaningful benefit (GBP40m EBITDA is expected to be delivered steadily to ''26). This led the CFO to state he is not ''uncomfortable'' with Cons. for FY''24 which does not appear to be reflecting the benefits from...
Share gains and pricing discipline has delivered a strong outperformance in H1, and whilst end market conditions remain challenging, the Board has "modestly increased its FY expectations. We have upgraded our FY2023 EPS by 6%, mindful of the uncertain macro-outlook and FX headwind in H2. On our new
Vesuvius has released H1 results ahead of expectations. Key highlights include that pricing has offset lower volumes and that although trading profit is down 18% y-o-y it is up 14% sequentially. Steel is still weak with volume declines sequentially, but Foundry is recovering. Cash conversion is improving. Modest increase to FY expectations (high single-digit / c.7%). Results summary Revenue £995m (-3% org. yoy), trading profit £105m (-18% yoy) implying an ROS decline of 200bps yoy to 10.5%, EPS 24.5p (-25% yoy), leverage 1.0x, cash improved 114% to £71m. Weakened volume demand (-8%) in the steel market vs. H1 2022, was partially offset by pricing increases. Despite this, the steel business performed well due to resilience in pricing and technical differentiation. The foundry division continues to recover with trading profits improving 18% yoy and RoS improvement up 130bps. Outlook A better than expected H1 2023 performance has resulted in a modest increase to current market expectations. Pricing discipline is to continue into H2 2023 in the steel sector and the foundry business is expected to continue to recover as the destocking period comes to an end. Investment case Vesuvius has made strong progress over the last few years, with a proactive management team showing how a business with cyclical commodity customers can still generate good and reliable value. The long-term investment case is centred on its strong positioning for changes taking place in Chinese and Indian steel, as well as for growth in traditional markets, and we expect management to drive continuous improvement in the business. It has potential for rapid earnings momentum, and we believe that the valuation remains undemanding in relative terms.
Our TP is based on a 1x EV/sales/EBITA margin correlation using our 2023E numbers. It is a stepping stone, in our view, to a more substantial value as the recovery potential and 12.5% margin target become realities.
The partial cash offer for RHI Magnesita (RHIM) doesn’t directly reduce the fragmentation in the refractory industry but it is a warning to the Boards of RHIM and Vesuvius (VSVS) that unless they do something about it private equity will drive the consolidation. Clearly, the focus on increasing the dividend when their shares were already providing a yield in excess of 5% has not attracted marginal buyers. Indeed, the appetite has been so low that even Rhone’s 39% premium for a 20% stake in RHIM only elevates its multiple to 6x 2023 consensus EBITDA. VSVS, which competes with RHIM in flow control and advanced refractories, is now trading at a 10% discount to this. Moreover, it has a much stronger balance sheet with prospective net debt/EBITDA ratio of 0.8x compared with 2.6x for RHIM. For now, we see no reason to change our target price of 552p, which values the stock at 7x 2023 consensus EBITDA.
Our TP is unchanged at 600p based on a 1x EV/sales, EBITA margin correlation off our 2023 forecasts. We reiterate our Buy recommendation.
Moving our base year to 2023E and maintaining the 1x EV/sales, EBITA margin correlation profile increases our TP from 510p to 600p. Buy.
The shares have traded broadly in line with the UK market this year; underperformed by c1% to be more pedantic. A charitable view would describe this is as a good performance against a negative market backdrop – we estimate that steel production outside China has been declining every month for the past 12 months on a year-on-year basis. However, critics may well point to a continuing failure to convert a credible operating performance into a higher long-term rating; we offered a solution to this deficiency in our previous note. For now, we would argue that if real consumption is to be maintained, then demand for capital goods, and therefore, steel, cannot remain subdued indefinitely and at some stage the cycle will turn in Vesuvius’ favour. Ahead of the trading update on 18 May, we continue to recommend BUY and a TP of 552p as we believe any sign of a turnaround will trigger a re-rating to at least 13.3x, the average of last ten years, compared with 9.8x 2023 consensus EPS currently.
The shares have held up reasonably well against a negative backdrop, but we still believe that any sign of a turnaround in steel markets will trigger a re-rating to at least 13.3x, the average of last ten years, compared with 9.9x 2023 consensus EPS currently. Notwithstanding any potential impact from a looming banking crisis, encouragingly, the steel output data so far this year has at least pointed to a deceleration in the rate of decline. However, we still believe investors may be better served if dividend was suspended and cash resources were used to establish a stronger market share and sustain higher margins; a yield of 5.2% pales against current risk-free rates. If we have reduced our TP by 2% to 552p, its only because 2023 EPS consensus has fallen by the same amount. We maintain our BUY recommendation.
Vesuvius Plc Vesuvius India Ltd
Vesuvius delivered a 9% H2 profit beat; margin was in line Group sales in H2 beat Consensus expectations by 9% and grew at an organic rate of ~15% YoY (Consensus at 11%). The beat was driven by the Steel division which came in 12% ahead of expectations. We note that the Steel division outperformed our Vesuvius weighted steel production volume series (which stood at c-9% for H2''22) by ~25% in H2, implying pricing was strong (c.20%) and that the market share gains that Vesuvius speak to are credible. Trading profit margins came in-line with VA Consensus (at 9.7%, +140bps YoY; -280bps HoH), driving a 9% H2 profit beat. Pricing is expected to stick while guidance implies Cons numbers are fine... Despite increasing prices by ~20% in FY''23, as things stand, Vesuvius expects this higher price level to stick, unless of course raw material costs fall further (at which point it will pass on lower costs to customers). Volumes are expected to decline by ~5% in Steel, which seems cautious to us, while volumes in Foundry should fare better. In all, Vesuvius guides to trading profit that is in line with market expectation (~GBP183m). However, this is post taking GBP3-5m charges because of the cyber-attack in February, which Consensus didn''t reflect, implying a small underlying upgrade. ...However, guidance is H2 weighted and therefore bears some risk Vesuvius noted how trading deteriorated through H2 with Q4 significantly weaker than Q3. At the same time, Q1 is shaping up to be weaker than Q4. Considering that Vesuvius will underproduce to clear inventory in H1 (which is likely to impact profit by ~GBP10m) and the cyber-attack related charges, margin in H1 23 should be weaker than H2 22. Considering the limited visibility Vesuvius have, inherently there is risk attached to any guidance that has a H2 weighting. Nevertheless, we believe such risks are more than reflected by the valuation of the shares (close to trough levels). We update our numbers for latest...
Key highlights: Record FY22 results, profit c3% ahead of expectations, market share gains and positive pricing, strong cash, FY23 set to be in-line expectations. Results summary FY22 revenues increased by 25% (18% underlying) to £2,047m, driven by pricing and market share gains. The adjusted operating margin expanded 240bps to 11.1% resulting in operating profit of £227m, up 60% (50% underlying). EPS increased 60% to 56.5p and the dividend is increased by 5% to 22.25p. Cash was strong and net debt was £255m (vs £277m in FY22), representing 0.9x EBITDA.. Outlook Management expects continued market share gains given its technology and offering, underpinned by an 18% increase in R&D in FY22. Pricing should offset cost increases. Steel and Foundry markets remain weak at the start of FY23 and don’t look likely to recover until later in the year. Negative fixed cost absorption relating to inventory reduction and c£3.5m of cyber security incident costs also provide headwinds. Despite all this management is confident of meeting market expectations (we are at the mid-point of the FY23 consensus profit range). 12.5% margin looks achievable in the medium-term on normalised volumes. Investment case Vesuvius has made strong progress over the last few years, with a proactive management team showing how a business with cyclical commodity customers can still generate good and reliable value. The long-term investment case is centred on its strong positioning for changes taking place in Chinese and Indian steel, as well as for growth in traditional markets, and we expect management to drive continuous improvement in the business. It has potential for rapid earnings momentum, and we believe that the valuation remains undemanding in relative terms.
A trading beat, more limited cyber security than might have been expected, reiteration of medium term margin targets and a robust 2023 profit bridge to a conservative forecast is an opportunity on a 9.8x PER.
If we need more than one reason to buy a stock, then we should probably not buy it. With Vesuvius (VSVS), at a PE rating of 7.7x, well below its average forward PE of 13x over the past decade should be enough. There is not a whiff of a positive data point, especially in the steel industry, if further inducement is needed. The real world is not a video game; it will take time but inevitably rising interest rates will repair supply chains and encourage capital formation outside China. We initiate with a BUY rating and a target price of 565p which will restore rating to 13x 2023 EPS. We would be more bullish if management used the free cashflow to help consolidate a fragmented refractory industry rather than focus on dividends.
Today’s news does not detract from the company’s investment proposition and we think share price weakness would be an opportunity given it trades on a 9.7x 2023E PE, which is based on conservative assumptions.
Key trading update highlights include: continued positive pricing and market share gains are offsetting market weakness, FY23 remains uncertain but FY22 trading profit should be “somewhat” ahead of the top end of expectations. Trading End markets have been week during H2, as expected, with steel production weakening globally (except India), while Foundry has also weakened globally, particularly in Europe. However, Vesuvius continues to outperform market growth while also taking market share. Positive pricing and FX have also been tailwinds in H2. H2 cash generation has been good, as it reduces inventory from that at the half year. FY22 Net Debt/EBITDA is expected to reduce to c1x (1.3x at H1). Outlook Management expects FY22 to be “somewhat” ahead of expectations. We believe this to be mid-to-high single % ahead of the top end of consensus expectations (VSVS compiled £194-209m). Visibility remains weak for FY23 and the unwind of inventory levels, which is a drag on fixed cost absorption, will continue into the H1 of FY23. Management is preparing to reinforce cost actions. Investment case Vesuvius has made strong progress over the last few years, with a proactive management team showing how a business with cyclical commodity customers can still generate good and reliable value. The long-term investment case is centred on its strong positioning for changes taking place in Chinese and Indian steel, as well as for growth in traditional markets, and we expect management to drive continuous improvement in the business. It has potential for rapid earnings momentum, and we believe that the valuation remains undemanding in relative terms.
The Group continues to outperform expectations in 2022, despite tougher end markets. The market share gains and successful execution on cost inflation recovery demonstrate the Group's technological differentiation which ought to provide some resilience if end markets deteriorate further in 2023. Al
Somewhat ahead A positive 3Q update from Vesuvius highlights the robustness of the business model, its pricing power and the flexibility of the cost base. This is underpinned by a strong balance sheet that will enable the company to further enhance its growth profile into the recovery of its end markets. The company now expects 2022 to be ‘somewhat ahead’ of expectations and we are forecasting 2022E EBITA of £220m from £195m, but the key point is that we are not washing this through into the outer years which makes these latter numbers very robust. A very well based 2023E PER of 9.3x and EV/EBITDA of just 5.9x is attractive. Harry.Philips@peelhunt.com, Henry.Carver@peelhunt.com
Looking through The outlook for the European steel industry through the balance of 2022 and into 2023 is a tougher one, with profitability below that booked in 1H. The debate is whether this is adequately reflected in forecasts and, therefore, valuation. There are several key points to consider for Vesuvius in this context: (1) our forecasts are conservative; (2) the company is a global business and the market leader in steel flow and foundry products; (3) it is supported by a strong balance sheet; and (4) the route to a sustainable margin target of 12.5% is clear. Our re-worked numbers edge our TP up from 500p to 510p. Buy. Harry.Philips@peelhunt.com, Henry.Carver@peelhunt.com
Meeting Notes - Aug 04 2022
VSVS SDR BBOX CTEC HIK SYNT TTG MGNS GYM CPI PETS WPP HRGLF
Vesuvius delivered a strong H1 print thanks to strong pricing Group sales came in 9% ahead of Visible Alpha expectations and grew at a strong organic rate of 21% thanks to strong pricing (+21%); volumes were flat. Considering that steel production was down ~4% in the period, the flat volume growth Vesuvius delivered at the Group level (+2% in its Steel division) could be viewed as encouraging. Afterall, it lends some support to the argument that Vesuvius is taking market share. However, we would refrain from getting too excited as it could also reflect customers restocking to some degree. Impressively, margin came in +120bps above expectations as Vesuvius fully offset inflationary pressures, driving a 20% Group EBITA beat. Vesuvius offered up a uniquely cautious guidance message; we expect a better H2 In the context of other industrial names that have reported, Vesuvius'' guidance strikes us as being uniquely cautious. Vesuvius guides to FY''22 EBITA towards the top end of analyst expectations, which prior to the H1 print, was marked by our numbers (GBP199m, +17% ahead of Consensus at the time). However, after the solid H1 print, profit would need to decline by 44% sequentially (HoH) to arrive to Vesuvius'' guidance. To put this into context, a decline of that magnitude is similar to what Vesuvius experienced at the depths of the COVID crisis, where profit declined by 38% HoH in H1''20. While Vesuvius notes that it will likely underproduce in H2, and so operating leverage should be harsh, guidance still strikes us as being particularly cautious. After assuming sequential volume declines of 7%, sequential price deterioration of 3%, and applying a volume drop through of 50%, our estimates for H2 are still well above the implied H2 guide and Cons expectations. As, a result we think earnings will continue to beat in the near term. Our FY''23/24 estimates do not change meaningfully as we assume pricing moderates We now assume that pricing deteriorates...
The group delivered a record half year performance that reflected the successful pricing strategy and market share gains across both divisions. Guidance for the second half assumes volumes weaken in H2, partly reflecting elevated customer inventory levels and lower fixed cost absorption as working
Vesuvius has posted strong H1 results. The key highlights are: continued strong trading, positive pricing and market share gains are offsetting market weakness, H2 remains uncertain but FY22 trading profit should be towards the top end of the consensus range, as communicated in the recent update on 25 July (VSVS compiled £155-199m / INVe £169m). Results summary H1’22 revenues increased by 26% (2% underlying) to £1,015.9m driven by pricing and market share gains. The adjusted operating margin expanded 340bps (+350bps underlying) to 12.5% resulting in operating profit of £127.4m, up 74% (69% underlying). EPS increased 75% to 31.4p and the dividend is increased by 5.0% to 6.5p. Cash was lower given working capital requirements and net debt was £327.7m (vs £277.1m at the end of last year), representing 1.3x EBITDA. Outlook H2 remains uncertain and management expects a material drop in volumes compared to H1, with the challenging cost environment broadly unchanged. Overall, the company now expects FY22 trading profit to be towards the top end of the consensus range. Investment case & valuation Vesuvius has made strong progress over the last few years, with a proactive management team showing how a business with cyclical commodity customers can still generate good and reliable value. The long-term investment case is centred on its strong positioning for changes taking place in Chinese and Indian steel, as well as for growth in traditional markets, and we expect management to drive continuous improvement in the business. It has potential for rapid earnings momentum and we believe that the valuation remains undemanding in relative terms.
The detail behind the beat Monday’s ad hoc announcement has taken the immediate surprise out of the equation, but the detail in the interims published this morning provides plenty of encouragement in terms of the company’s strategic development and medium- and long-term growth prospects. The trading backdrop is set to become tougher through the second half and into 2023E, but value-add Industrial companies producing process-critical products that enhance operational performance can run a proven pricing model. In the case of Vesuvius it suggests that the 12.5% margin target is 1) achievable and 2) sustainable. Buy, TP 500p. Harry.Philips@peelhunt.com, Henry.Carver@peelhunt.com
Setting the scene An ad hoc announcement from Vesuvius this morning outlined a substantial beat of first-half expectations, ahead of the formal announcement on 28 July. It means an upgrade for the current year and essentially an underpin for the outer years, which makes the stock look cheap trading on just 7.3x 2023 PE with a 6.8% yield. The strength of Vesuvius’s market position in steel flow controls and foundries, which are process critical, provides it with a pricing profile that remains under-recognised in our view. We maintain our Buy rating and 500p TP. Harry.Philips@peelhunt.com, Henry.Carver@peelhunt.com
Technology differentiation and market share gains Vesuvius has started 2022 ahead of expectations, with cost recovery around inflation particularly impressive and supported by further market share gains. At the same time, the company set out a ‘healthy dose of caution’ to reflect the ongoing geopolitical uncertainty which we have worked through into our numbers. Against a backdrop of increasing technology differentiation driving market share gains and an accelerating industry drive to green and sustainable steel, the company’s growth prospects remain compelling. We reiterate our Buy recommendation and 570p target price. Harry.Philips@peelhunt.com, Henry.Carver@peelhunt.com
Jan-April sales were strong - driven by significant pricing and market outperformance Vesuvius delivered strong organic sales growth driven by double digit pricing and a positive volume contribution. Steel was able to deliver volume growth despite Steel production declining in the period (c.-2% on Vesuvius geographically weighted basis). Encouragingly, Management noted that this outperformance was predominantly driven by market share gains. Customers restocking only slightly benefited its Advanced Refractory business (Flow Control did not benefit). Volumes in Foundry were flat, as growth in industrial markets was offset by weaker Auto and Truck markets. Headline EBITA grew by 60% YoY implying margin recovered materially What was most surprising was the phenomenally strong 60% organic profit growth in the period. This is explained by pricing slightly more than offsetting the cost inflation that Vesuvius had to contend with and good operating leverage on the modest volume growth it delivered. In our view, this strong organic profit growth implies that margin is likely sitting above 11.0% today. Consensus expectations now appear far too low even if we see a H2 slowdown After the stellar performance to date Consensus expectations appear far too modest. One would have to assume H2 volumes collapse, or that input inflation worsens sequentially to arrive to Consensus numbers. While Management reiterated guidance and expressed caution in respect to H2 - volumes are expected to decline sequentially impacting profitability - we think this is from a much higher H1 base than Consensus currently models. Overleaf, we show how even if we model a sequential slowdown in H2 and a healthy dose of caution, Consensus expectations appear far too modest. We update our estimates for the Q1 IMS; we lift our TP to 500p (from 485p) We now model a much larger contribution from pricing which offsets the cost inflation that Vesuvius has seen to date. Further,...
Vesuvius has released a positive 4M update highlighting stronger than expected trading, a material margin improvement, and unchanged FY22 expectations. Current trading There was strong volume growth in the Steel division plus market share gains, particularly in Flow Control, across all regions. The Foundry division’s volumes were broadly in-line y-o-y as the auto market continued to weaken. Successful price increases were implemented that more than fully compensated cost inflation and this, with higher volumes and lower costs, generated 60% growth in trading profit. Working capital is up with higher sales and safety inventory, but net debt should be flat at the half-year. Outlook Despite a weakening economic environment, and lowering of growth expectations for steel and automotive production, management expectations for FY22 Group performance is unchanged given the strong start to the year and its ability to actively manage cost pass-through with pricing. Investment case & valuation Vesuvius has made strong progress over the last few years, with a proactive management team showing how a business with cyclical commodity customers can still generate good and reliable value. The long-term investment case is centred on its strong positioning for changes taking place in Chinese and Indian steel, as well as for growth in traditional markets, and we expect management to drive continuous improvement in the business. It has potential for rapid earnings momentum and valuation remains undemanding in relative terms. The shares are trading on a FY22E PE of 7.7x and EV/EBITDA of 4.9x, falling to 6.9x and 4.4x respectively in FY23E.
Key highlights & outlook Strong results which are a 5% consensus profits beat, with good pricing to help offset cost inflation, and a 22% dividend increase reflects a good balance sheet position and underlying confidence. 2022 has started well and the benefits of annualised price increases and recent acquisitions are to materialise. External headwinds remain for now and the Group has suspended deliveries in Russia (we estimate Russia and Ukraine represented c2.5% of Group revenues). Financial summary FY21 revenues increased by 13% (18% underlying) to £1643m (INVe £1,604m / consensus £1,593m), driven by recovery and market share gains. The adjusted operating margin expanded 170bps (+190bps underlying) to 8.7%, resulting in operating profit of £142.4m (INVe £138.5m / consensus £135m), up 40% (50% underlying) – note that there was a £14m cost impact due to timing on price increases. EPS increased 52% to 35.3p (INVe 33.8p / consensus 33.4p). The FY21 dividend is 21.2p, a 22% increase y-o-y. Cash was strong and net debt was £277.1m (vs £175.1m at the end of last year) and represents 1.4x EBITDA. Investment case & valuation Vesuvius has made strong progress over the last few years, with a proactive management team showing how a business with cyclical commodity customers can still generate good and reliable value. The long-term investment case is centred on its strong positioning for changes taking place in Chinese and Indian steel, as well as for growth in traditional markets, and we expect management to drive continuous improvement in the business. It has potential for rapid earnings momentum and valuation remains undemanding in relative terms. The shares are trading on a FY22E PE of 8.9x and EV/EBITDA of 5.5x, falling to 7.9x and 5.0x respectively in FY23E.
The Group enjoyed a strong recovery in volumes in 2021 and successfully recovered input cost inflation by year-end, restoring margins, despite increased investment in the growth drivers. Whilst we acknowledge the risk relating to the situation in Ukraine, we feel this is adequately discounted at th
Despite the downward revision to our 2022 sales growth expectations, we're confident that Vesuvius can ultimately achieve its medium-term operating margin target of 12.5% once steel production in its key end markets returns to pre-pandemic levels, on a sustained basis. The shares remain cheap on a
Reminding ourselves of the opportunity The outlook for global steel demand ex-China continues to be positive heading into 2022 with a further underpin from low finished steel inventories in Europe and North America. Add in the recovery profile of global auto production expected to drive Foundry in 2022 and Vesuvius is set for a good start to the year. The pricing model is robust and well proven, which gives us confidence in the ultimate delivery of the 12.5% operating margin albeit we do not currently have it reflected in our forecasts, so more opportunity. We reiterate our Buy rating and increase our TP from 435p to 570p. Harry.Philips@peelhunt.com, Henry.Carver@peelhunt.com, Afonso.Osorio@peelhunt.com
The acquisition of Universal Refractories in the US strengthens the Group’s North American footprint, adding complimentary refractory and foundry products. The deal is expected to be both margin and earnings accretive, even before anticipated synergies. We note that the shares have fallen 25% over
Sales were said to be in line with Management expectations Vesuvius refrained from disclosing sales growth in the period, instead discussing broader market trends. It noted that Steel production remained strong in all regions outside of China and that developments in most of Foundry''s end markets - with the notable exception of Automotive (c.26% of Foundry sales) market - were encouraging. In all, sales in the July-October period were said to be in line with Management''s expectations. Looking forward, Vesuvius noted that it still expects sales in H2 to be broadly similar to the H1 level (in keeping with prior messaging), with pricing gains making up for slightly lower volumes (on account of Foundry). Guidance implied small cuts to consensus expectations... All eyes were on Vesuvius'' outlook for the year. With inflationary pressures intensifying in the period since Vesuvius reported its H1 results, the market was primed for a downbeat message. Within this context, the message Vesuvius delivered wasn''t all that surprising, in our view. Vesuvius stated that it expects headline operating profit to be within the bottom range of Consensus expectations (GBP137-147m). In our view, this is likely to lead to Consensus FY''21 trading profit forecast cuts of 2/3% from GBP143m - a scenario we believe was already priced in by the market. There are hopes that pricing can offset inflationary headwinds from Y/E Whilst the inflationary backdrop remains challenging, encouragingly Vesuvius has been able to increase prices such that if input costs stabilise at current levels it expects to fully mitigate the inflationary pressures from freight and raw materials from Y/E. Whilst visibility in regard to how cost pressures evolves clearly remains limited, we find it encouraging to hear that Vesuvius is successfully putting through price increases to combat headwinds and that it expects to able to continue doing so should input costs continue to rise. We update...
Current trading Steel production and demand remain strong across key markets, with the exception of China, which has recently experienced significant month-on-month production declines due to state intervention to reduce production and restrictions on power usage. Foundry end-markets across most regions also remain strong, with the exception of the automotive industry, where, despite robust demand, production growth has significantly underperformed expectations earlier in the year due to the continued global shortage of semi-conductors, as well as broader supply chain difficulties. Management expects these challenges to persist well into 2022. Price increases have been successfully implemented during 2021 to offset well-flagged cost headwinds. However, the lag between cost and selling price increases has negatively impacted year-to-date profit margins – margins are expected to be restored by year-end. Working capital has increased via inventory, particularly in raw materials and certain finished goods, to mitigate against the risk of supply disruption to its customers. Despite this, management still expects to finish the year with a materially better working capital to sales ratio than in the prior year and net debt/EBITDA to be c.1.1x. Outlook Revenue growth to October was broadly in line with management expectations, despite the weakening in auto end markets and slowing steel production in China. Ongoing raw material price and freight cost increases experienced to date have had some adverse impact on margins. In response, Vesuvius has successfully negotiated selling price increases which at current cost levels will restore margins as from year end. Consequently, management expects Group trading profit (EBITA) for FY21 to be in line with current analyst expectations (company-complied £137-147m), albeit towards the lower end of the range. Management comments that the long-term outlook looks positive. The shares are trading on a FY21E PE of 13.0x and EV/EBITDA of 7.5x, falling to 10.8x and 6.4x respectively in FY22E.
Despite the ongoing headwinds in the second half, the Group has successfully negotiated price increases to offset raw material inflation and higher freight costs, and expects to restore margins from the turn of the year. Our full year forecasts are unchanged and we believe the Group is well positio
We have updated our FY2021 forecasts to reflect the decline in global automotive production now expected in H2 and the continued headwind from freight and raw material cost inflation. We have cut our EPS forecasts by 4% for this year and 9% next and acknowledge that the incremental cost pressure in
Vesuvius delivered a strong topline print... Under the backdrop of improving steel production trends and an easy comp (-18% organic sales declines in H1 20) Vesuvius delivered 18% Group organic sales growth in H1''21. Sales beat Consensus expectations by 7%, with both divisions contributing to the beat. Further, we estimate that organic sales growth in Q2''21 was c.31%, implying that Group sales in Q2''21 were only c.3% below Q2''19 on an organic basis (Q1''21 sales were c.6% below Q1''19). ...however freight costs weighed on profitability Despite the stronger topline print, headline profit narrowly missed Consensus expectations (1% below) as surging freight costs weighed on margins (particularly in Steel). Vesuvius called out a GBP10m headwind related to freight costs in H1 and cautioned that freight rates are likely to remain elevated in H2. Encouragingly, however, it is putting through price increases and seems to be managing the situation better than peers (RHI). Vesuvius has already put though a first round of price increases (with full benefits expected to flow through in H2) and are now also introducing a second round of increases, with the CEO on the conference call even suggesting that there may be scope for a third increase, if inflationary pressures intensify. Looking forward, the demand outlook remains positive Looking beyond current elevated freight rates, which in our view, are unlikely to be sustained through ''22 (we currently expect a partial reversal in our FY''22 profit bridge), the demand backdrop remains encouraging. Steel inventories are at historical lows, whilst end user demand remains elevated and above steel production, this should bode well for an eventual restocking cycle playing out and could support stronger H2 demand than Consensus expects or guidance implies. We update our estimates for latest trading; our TP moves to 630p (from 640p) We update our estimates for latest trading and FX leading to c.-5/+2%...
Key highlights & outlook Good recovery and margin performance (despite increased costs). Demand is expected to remain strong, however, a lag in incremental selling price increases until H2 limits FY21 consensus upgrade potential. Vesuvius continues to experience inflationary pressure in certain raw materials and freight; this will be offset in H2 through incremental selling price increases currently being implemented. Consequently, trading profit in the second half is expected to be similar to the first half. Overall, management expectations for the full year are unchanged. Financials First half 2021 revenues increased by 12% (18% underlying) to £808.1m. The adjusted operating margin expanded 200bps to 9.1% resulting in operating profit of £73.3m, up 43% (+54% underlying). EPS increased 54% to 17.9p. The interim dividend is declared at 6.2p, +100%. Cash was strong and net debt was £196.6m (vs £175.1m at the end of last year). Investment case & other items Vesuvius has made strong progress over the last few years, with a proactive management team showing how a business with cyclical commodity customers can still generate good and reliable value. The long-term investment case is centred on its strong positioning for changes taking place in Chinese and Indian steel, as well as for growth in traditional markets, and we expect management to drive continuous improvement in the business. It has potential for rapid earnings momentum and valuation remains undemanding in relative terms. The shares are trading on a FY21E PE of 14.8x and EV/EBITDA of 8.2x, falling to 12.5x and 7.2x respectively in FY22E. There is a results presentation at 10.00am.
Global steel production has continued to improve through H1 and has now surpassed the peak in 2019. Output levels in North America and Europe, both key markets for Vesuvius, remain below their prior peak, but the gap is steadily closing. We expect the spike in US prices to translate to increased ou
The Q1 update confirmed that the recovery had continued through Q1 and trading YTD is a little stronger than expected at the prelims in March, delivering a healthy FY upgrade, despite the additional freight costs. We believe that the outlook for both the Steel & Foundry end markets remain posit
Organic sales growth improved in Q1 21 Aided by improving steel production trends and an easy comp (-12% in Q1 20) Vesuvius delivered organic sales growth of 7% in Q1 21. Growth in Steel and Foundry was noted to have been broadly similar and within the Steel division, growth in Flow Control was said to have been stronger than in Advanced Refractories, aided by market share gains in the former. Management still retained an element of caution in their messaging Vesuvius also refreshed its outlook and now expects to deliver headline profit that is ''moderately ahead'' of Consensus expectations (Company compiled at GBP138mn). In terms of the various headline profit bridging items, raw material inflation is expected to be fully offset by positive pricing, whilst increased freight costs are expected to represent an incremental low single digit million headwind. Encouragingly, the CFO noted that a c.40% drop through in FY''21 still appears reasonable. At the same time, however, Management were keen to keep a lid on expectations, noting that whilst there had been an improvement in its markets, demand still remained below 2018 and 2019 levels in many markets and highlighted that a degree of uncertainty still persists. We find reasons to remain constructive Things are now moving in the right direction for Vesuvius. Consensus only models 10% organic sales growth in H1 (Vis. Alpha) and after 7% in Q1 and an easy Q2 comp to come, we would expect Vesuvius to deliver substantially more growth than this. Further, with run-rate Steel production trends appearing encouraging (March run-rate production rates imply c.14% volume growth in ''21) and a restocking cycle yet to play out, we find reasons to remain constructive. We update our estimates for latest trading; our TP moves to 640p (from 610p) We update our estimates for latest trading and FX leading to c.2% upgrades to our FY21/FY''22 EPS estimates. Our SOTP22e derived target price moves to 640p (from...
The final results confirmed that the outlook for the global steel industry continues to improve into 2021. Although £31m of temporary cost savings will unwind this year, we expect stronger top-line growth to absorb this. Our FY2021 PBT forecast is unchanged, but we now see a clear path towards the
Vesuvius delivered a decent underlying performance... Relative to Consensus expectations Vesuvius delivered a decent set of results. Sales came in 2% ahead with topline momentum developing positively (-14% in Q3 vs +3% in Q4 we estimate) whilst headline profit, after adjusting for one-offs, came in c.12% ahead (3% light of Exane BNPP). Despite this the stock declined sharply on the day. ....But the market was already primed for a significant beat Clearly the market was primed for a beat. Whilst the magnitude of the beat was a little underwhelming, what weighed on the stock, in our view, was the harsh operating leverage that Vesuvius displayed in H2 20. Indeed, drop-through (ex.one offs) in H2 stood at c.42% (c.29% in H1) implying that the drop through on the underlying volume declines, excluding any cost savings, was c.100% in H2 20, compared to c.50% in H1. Clearly a somewhat disappointing development. Risk reward into 2021 remains skewed to the upside; potential for beats remains The conference call provided some reassurance, in our view. Management''s comments around likely drop-through in 2021 (c.40%) point to c.8-12% underlying Consensus earnings upgrades, should Consensus model 9-10% organic sales growth in 2021. Further, commentary around possible restocking cycles and the suggestion that industry steel production forecasts for next year may be too conservative, should have been taken well. Indeed when we weight the latest January steel data for Vesuvius'' geographic exposure we note that run-rate production is already running c.12.5% ahead of 2020 (16.5% for H1). With steel production unlikely to slow down sequentially and the potential for a restocking cycle yet to play out we see scope for positive surprises in ''21. Risk reward into 2021 remains skewed to the upside; scope for big beats remains Better steel production data leads us to model a higher organic sales growth at the Steel division leading to c.2% underlying...
FY20 results are modestly ahead of profit expectations. Our key highlights are: strong cash, good cost savings and an improving outlook – all of which underpin a significant increase in the dividend. FY20 results – positive FY20 revenues declined by 14.7% (-12.7% at constant currency) to £1,458m. The adjusted operating margin contracted 360bps to 7.0% resulting in operating profit of £101.4m (INVe £98.2m), down 44.1% (-43.3% at constant currency). EPS decreased 48.6% to 23.2p (INVe 22.3p / consensus 22.7p). A dividend of 17.4p shows a significant increase. Cash conversion was strong at 173% and net debt was £175.1m (vs £245.8m last year), representing 1.2x EBITDA. Outlook – clear signs of recovery There are clear signs of recovery in both its Steel and Foundry end markets and this should accelerate through the year. This, along with a leaner cost base, gives management confidence in a significant financial improvement in 2021 (INVe FY21E c35% profits growth). Investment case – cyclical recovery play Vesuvius has come a long way over the last few years with a proactive management team showing how a business with cyclical commodity customers can still generate good and reliable value. The long-term investment case is centred on its strong positioning for changes taking place in Chinese and Indian steel, as well as for growth in traditional markets, and we expect management to drive continuous improvement in the business. It has potential for rapid earnings momentum and valuation remains undemanding relatively. The share are trading on a FY21E PE of 16.4x and EV/EBITDA of 9.0x, falling to 15.1x and 8.4x respectively in FY22E.
The outlook for the global steel industry continues to improve, benefiting from strong demand from the Automotive and Mining sectors. The temporary cost savings Vesuvius implemented in 2020 dampened the operational gearing impact but will unwind through 2021. However, the structural cost savings ou
Sales recovered in Q3 and the Group made an encouraging start to Q4... Group organic sales growth recovered in Q3, with YoY declines moderating to -14% (compared to -26% in Q2). In addition, it should be noted that YoY sales only declined 7.5% in October, with Vesuvius highlighting on its Q3 conference call that it expects November to trend similarly, and that its end markets were clearly in ''recovery mode''. ...yet Vesuvius only guides to EBITA that is in-line with Consensus expectations Despite the encouraging start to Q4, Vesuvius only guides to Headline EBITA20e that is ''broadly in-line'' with Consensus expectations (c. GBP99mn). Considering that Consensus models c.14% organic sales decline for H2, and that organic sales only declined by c. 7% YoY in October, full year guidance seems rather conservative. Indeed, should we consider a scenario where Vesuvius is able to contain drop through to a level that is similar to that seen in H1 (c.30% / 50% excluding cost savings) then we think that sales would have to decline by c.-17% across November-December to prevent Vesuvius from beating the new guidance. Alternatively, Vesuvius would need to fall short of its targeted cost savings. We view both scenarios as less than likely and hence believe Vesuvius should beat at the full year print. Inventory levels at customers are low; Vesuvius could benefit from a restocking cycle In another encouraging sign, Vesuvius commented that refractory inventory levels at its customers are low. Management highlighted that the level of steel inventories at producers is also low. Taken together this implies that Vesuvius should benefit relatively quickly from underlying demand improving in its end markets. Further, the potential for customer restocking, whilst downplayed by Management, should not be ruled out; this could become a further tailwind in early 2021. Updating estimates; Outperform rating reiterated; TP moves up to 500p We update our estimates...
Our view A positive trading update from Vesuvius – the key highlights are sequentially improved trading, good cost savings and cash, and a FY20 outlook is in-line with market expectations. We believe this should all be taken positively and feel confident of higher margins on recovery given cost actions. Trading improving Demand in both its Steel and Foundry markets has improved during Q3 2020 with sales up 7.0% sequentially, although down 14.3% year-on-year. This compares favourably to Q2 2020 which had a 26.2% sales decline year-on-year. October 2020 continued to show better trading with sales down 7.5% year-on-year. Its Covid-19 cost savings programme is on track to deliver £10m of savings per quarter in H2 2020, with restructuring actions set to deliver £19.4m per annum in 2020. Working capital management remains a focus with WC/sales of 22.4% vs. 26.7% at the half year, aiding a strong liquidity position of £448m, £73m higher than in February this year. As previously announced (20 Oct), the dividend has been reinstated with an interim dividend of 3.1p (2019: 6.2p). Outlook in-line Despite improving trends, management cites that uncertainty remains regarding the speed of recovery during 2021. FY20 Group EBITA is expected to be broadly in-line with market expectations (company-gathered consensus is £99.2m, compared to INVe £98.2m). Investment case and valuation Vesuvius has come a long way over the last few years with a proactive management team showing how a business with cyclical commodity customers can still generate good and reliable value. The long-term investment case is centred on its strong positioning for changes taking place in Chinese and Indian steel, as well as for growth in traditional markets, and we expect management to drive continuous improvement in the business. On our forecasts, the shares trade on a FY21E PE of 14.2x and EV/EBITDA of 8.0x with a dividend yield of 2.8%.
A crisis will often reveal the extent to which a business has transformed itself. In Vesuvius'' case, the transformation is marked. At the height of the GFC Vesuvius (then Cookson) had to issue equity; in what is likely to be the trough of this Crisis, Vesuvius delivered a strong beat and a good cash performance. With momentum likely to improve from here, the historically wide discount at which the shares trade at should narrow in the months to come. We reiterate our O/P rating. Considerable cost actions resulted in a commendable margin beat Vesuvius'' H1 surprised on all fronts; topline came in 2% ahead, whilst headline EBIT came in 16% ahead, aided by the strong cost action that was taken in the first half - GBP30.9mn of cost savings were delivered in all, of which GBP18.6mn were noted to have been more temporary in nature. Cash was also good, with cash conversion at 140% and net debt edging down. Moving forward, we expect cost actions to continue to support margins and are confident that Vesuvius can deliver on its targeted GBP10mn of temporary costs savings per quarter. We note that government backed, ''furlough-like'' schemes only contributed c.GBP7.8mn of temporary cost savings in Q2, which to us signals a low risk of an H2 cost savings disappointment. Excess steel inventory clearing the market; signs of a recovery emerging Encouragingly, Vesuvius management noted that the recovery in Steel markets has been quicker than it had anticipated - excess Steel inventories across the market could, in all likelihood, get absorbed by during Q3. In addition, key Steel producers, such as ArcelorMittal, also seem to convey a more upbeat message in regards to underlying Steel demand; supportive a scenario where a recovery across the second half of the year is more meaningful than Consensus had previously anticipated. Considerable cost actions resulted in a commendable margin beat We update our estimates for recent trading and FX. Our FY''20/FY21...
Current trading All plants are now open, but at reduced levels to align with demand and certain Covid-19 related procedures. Q1 trading was marginally ahead y-o-y, but April posted a 28% y-o-y decline as the Covid-19 impact really hit globally and in Vesuvius’s core end markets of Europe and USA. As detailed at its Covid-19 update on 6th April, management plans to deliver c£10m of cost savings per quarter in addition to planned c£19m savings already due. Capex down 30% saving £20m, and the dividend cut saving £38m. Management still believes it is too early to provide full year guidance. Liquidity improves Liquidity has been enhanced by £314m through the issuance of a USPP (intended to repay the £114m USPP which expires in December 2020) and accessing the BoE’s CCFF. Overall Group covenant is now up to 3.25x EBITDA (from 3x).Net debt has only marginally increased since December. Our view and valuation This is a solid update, but clearly Covid-19 will negatively impact the Group; note we reduced our FY20E PBT forecasts by 40% in April to try and reflect the impact of Covid-19 on trading. Vesuvius has come a long way since its demerger from Cookson with a proactive management showing how a business with cyclical commodity customers can still generate good and reliable value. The long-term investment case is centred on its strong positioning for changes taking place in Chinese and Indian steel, as well as for growth in traditional markets, and we expect management to drive continuous improvement in the business. For FY20E, the shares are trading on 15.9x PE and 7.9x EV/EBITDA, falling to 10.6x and 6.2x respectively in FY21E.
In-line FY19 results on lowered expectations Revenues declined by 4.9% (-5.7% organic) to £1,710.4m (INVe £1,741m, consensus £1,754m) driven by both Steel and Foundry. The operating margin contracted 40bps to 10.6% driving an operating profit decline of 8.0% (-9.0% organic growth) to £181.4m (INVe £181m, consensus £181m). EPS decreased by 9.1% to 45.1p (INVe 42.9p, consensus 43.1p). The dividend was increased by 3.5% to 20.5p (INVe 20.4p). Cash generation was strong (120% conversion) and net debt reduced by 12.7% to £216.3m (excluding IFRS 16). Outlook – expect a tough start to 2020 Key end markets were especially weak during the fourth quarter of 2019 and management expects this abnormally low level of activity to continue at least in Q1 2020 and to weigh on performance in H1 2020. The potential impact of the COVID-19 health crisis is difficult to assess, but is likely to have a temporary negative impact on its end markets. However, there are some signals indicating that the destocking phase experienced in H2 2019 is maturing and may shortly be coming to an end. Given external factors at play and the unknown impact of COVID-19, we believe the risk to FY20 consensus forecasts is modestly on the downside. However, we note that management is making a commendable effort to mitigate these headwinds. Our view and valuation Overall, these are resilient results that are in line with our forecasts and consensus at the profit levels, but 5% ahead at EPS. Revenues declined as expected and the margin was robust in lower volumes, highlighting restructuring efforts. FY20 headwinds are obvious but largely represent external factors and we believe the valuation is cheap enough to mitigate any potential earnings volatility. Vesuvius has come a long way since its demerger from Cookson with a proactive management showing how a business with cyclical commodity customers can still generate good and reliable value. Vesuvius is well-placed for changes taking place in Chinese and Indian steel, as well as for growth in traditional markets, and we expect management to drive continuous improvement in the business. The shares are currently trading on a FY20E PE of 9.1x and EV/EBITDA of 5.9x, falling to 8.5x and 5.7x respectively in FY21E. The shares also offer a dividend yield of over 5%.
QE is like Heineken, except it destroys things other stupid policies cannot reach. In the steel industry, it has the remarkable ability to encourage more capacity building while destroying demand. Since our downgrade to SELL on July 22, the fundamentals have deteriorated further with global steel capacity utilisation falling back to Q3/15 levels. China, struggling to find domestic home for its steel, is ramping up exports and destroying margins anywhere where it can. However, demand is struggling to pick up. US domestic steel output and prices have cracked despite imposition of heavy import duties. We believe we are heading for another almighty crash, and it is hard to see how Vesuvius can sustain H1/16 performance in H2/16. We expect FY EPS to come 7% below consensus.
At the start of the year, we were wrong to assume that China would take action to curtail its excess capacity and help stabilise steel markets. Latest data suggests otherwise. As Chinese surplus and global imbalances build up, trade barriers in markets like the US and India will soon be overwhelmed. As production rates come under pressure outside China, it is hard to see how Vesuvius can sustain H1/16 performance in H2/16. Consequently, we are moving our recommendation from BUY to SELL, with a target price of 300p (from 380p).
The economics of the US steel industry continue to improve, albeit not because of demand. Tariffs are helping to cut Chinese imports in the US markets, where steel prices are now up 70% since the low point in December 2015. More importantly, capacity utilisation at US steel mills has improved from 60% in December 2016 to 75% in early June. Year-to-date US steel output is still around 2% below the same period last year, better outcome than expected given the excess Chinese production. Bears will argue that fundamentally the industry is still weak given the global over-supply. We continue to believe that at some stage China will have to take action as its steel is increasingly unwelcome around the world.
Vesuvius will issue a trading update on Thursday and we expect the management to remain cautious about trading, particularly given that China appears to be reversing its policy of cutting capacity. However, we continue to believe that the fundamentals of the steel industry are improving and therefore we maintain our BUY recommendation. We believe as its exports are made increasingly unwelcome across the world, China will have no option but to cut capacity as domestic stocks rise and losses mount. US steel prices are up more than 50% and this matters more to Vesuvius as US mills increase production and restocks on consumables. The management is not relying on a turnaround to deliver cash returns. However, as fundamentals improve the risk to our forecasts are on the upside. In the meantime, an attractive yield of 5%, which we believe is sustainable, underpins the share price.
Improvement in steel markets look real; production is being cut. In the first two months of 2016, global steel output fell by over 5% year-on-year. China, which still produces 50% of world steel, is leading the way with 6% cut in output. In the US, after heavy falls in January, output grew 3% in February and has continued to grow at this pace in March so far. For Vesuvius, the mix of cuts is beneficial as it sells more and makes higher margins in the US than in China. We now believe US sales will fall by 5% this year versus our previous expectation of a 10% fall. At the same time, we expect Asia-Pacific sales to fall 5% and not 1%. However, the margin mix will improve, and as a result we are upgrading our 2016 forecast by 6% to 23.9p, and our target price to 380p (from 370p).
Today’s results confirmed that nothing has materially changed – Vesuvius remains a cyclical business operating in a very mature industry and the best the management can do is to focus on return on capital rather than capital growth. Five years of “growth” and “restructuring” have been undone in one year: 2015 sales and trading profits were below 2010. While the valuation in the long-term will continue to be driven by the dividend, the cyclicality of the steel industry will inevitably create swings of greed and fear. We seem to have entered a period of greed, with the latest US anti-dumping decision currently providing most of the excitement. If the current discipline of production cuts is maintained, then the news flow on steel prices and expectations of rebound in 2017 steel output will add momentum to the share price. We are raising our target price to 370p (330p), equivalent to 4.4% yield. This compares with the average UK market yield of 3.4%.
Investors may be shocked to learn that at least one segment of the commodity world appears to have pulled its head out of the sand, i.e, react to demand and price signals. Global steel output fell 7.1% yoy in January, with China leading the way with cuts of 8%. Other major exporters such as Brazil, Russia, Japan and Korea also cut output. If this trend was maintained then we can expect that Vesuvius’s EPS to bottom out this year. We believe a sustainable dividend limits the downside risk, offering significant upside should the US and EU steel outputs recover in 2017. Vesuvius reports full year results of March 3.
US steel production capacity utilisation, at 65%, is now entering the death zone. Latest data show that the US steel production is now falling at its fastest rate this year: down 17% year-on-year in the week ending November 23. What is worrying is that this cannot be blamed entirely on cheap Chinese imports. In fact, US imports of Chinese steel are now down 20% YOY in the ten months to October. Indeed, the share of imports in the US market has fallen from 34% in January to just 26% in October. It would seem that the US demand for steel is falling so fast that even cheap Chinese exports are struggling to find a US buyer. We are cutting our EPS forecast by 9% and 20% in 2015 and 2016, respectively. Cutting capex will help pay the dividend this year, but what about 2016 when free cash flow will be well short? Our experience with Fenner shows that the dividend will be the last thing to be cut by which time it will be too little, too late.
ArcelorMittal, one of Vesuvius' largest customers, has confirmed today that the steel industry is in a crisis as the world's largest steel consumer and producer is in a recession and its excess supply is causing havoc in other steel producing countries. It now expects global steel demand to decline by 1.5-2.5% in 2015 versus previous expectations of zero growth. It has cut its EBITDA forecast by 13-23% and suspended its dividend. However, this is not some cyclical downturn. Like Tata Steel in the UK, ArcelorMittal is also being forced to close mills and this represents permanent loss of revenues for Vesuvius, which will fully impact from 2016. Combined UK and South Africa represent over 8% of group sales. However, closures are not limited to these countries. US customers such as AK Steel are also temporarily closing mills; we suspect some of these temporary closures will become permanent.
SGL Carbon last night warned that it expects group profit to decline significantly in 2016 due to renewed pricing pressure in the graphite electrode market and in spite of cost cutting measures. It appears that steel customers are starting to reduce and/or postpone their demand for graphite electrodes already for Q1 2016.
Last week, we had warned that many of Vesuvius' steel-making customers face extinction as China floods the markets. On Friday, one of its top customers, AK Steel announced that it is idling capacity. This week, according to several news reports, Tata Steel, another top customer, is expected to reduce its UK capacity further. This is not cyclical destocking: this is a structural decline, and Vesuvius faces permanent loss of revenues. We expect more restructuring charges as Vesuvius scales back its operations in the US, the UK and South Africa. Our 300p target price offers 20% downside. We move the stock to our Conviction Sell list.
Mass migration is not just a human phenomenon. Increasing proportion of Chinese steel is looking for home, too. The trouble is that as financial markets applaud and encourage more Chinese government stimulus (i.e. throw more good money at bad), the volume of Chinese steel looking for a buyer is going to explode. Trade barriers are unlikely to stop international steel prices from continuing to fall; several of Vesuvius's customers outside China face extinction. We are cutting our 2015 sales and EPS forecast by 4% and 7%, respectively. Our target price has moved to 300p (350p), valuing the shares at 10.6x 2015 EPS.
The management may be digging itself into an even bigger hole rather than accept the fact that they misread their markets back in March and focus on stabilising the balance sheet. Back in March, the company said trading will be similar to 2014, guided for margin improvement and raised dividend by 8% even though it would have been obvious to anyone with access to internet that its customers were under pressure and such confidence was unrealistic. Indeed, the US steel production was falling in double-digits at the time. But pride says margin improvement and dividend growth has to be delivered at any cost. Hence, new and greater restructuring costs charged below the line announced today while 3% dividend growth is completely out of sync with reality. The end result is that the balance sheet is taking the strain of this intransigence. Sell at least until the management stops digging.
