Vesuvius PLC (LON: VSVS) – Reported a stellar 43% growth in the trading profit during H1 FY21 

Vesuvius PLC (LON: VSVS) is an FTSE 250 listed Company, which is the global leader in metal flow engineering. Moreover, the Company serves clients from the steel and foundry industries by providing end to end engineering services & solutions to customers worldwide. Furthermore, VSVS reports revenue under two broader categories – Steel & Foundry.

Recent Trend of Dividend Payments: The Company will pay an interim dividend of 6.2 pence per share on 17 September 2021, with an ex-dividend date of 05 August 2021. Moreover, the Company had shown a robust increase of approximately 100% in the interim dividend from the prior-year levels.

Growth Prospects

• Industry-Leading R&D Investments: The Company had strengthened the technology leadership as VSVS spent around £14.8 million on R&D initiatives during H1 FY21, an increase from £13.6 million spent during H1 FY20. Moreover, the Company launched 12 new products during H1 FY21 and remained on track to achieve a target of launching 22 new products in 2021.

• Capacity Expansion in Steel: VSVS will undertake a £28 million capacity expansion to be effective from late 2022. Moreover, the Company would aim to increase the manufacturing capacity of various projects in Asia and EMEA to support ongoing & future organic growth and market share gains.
• Robust Global Steel Production Growth: Steel production across the world (except China & Iran) accounted for almost 90% of the Company’s sales. Moreover, the steel production growth remained around 31.3% in India and almost 28.2% in South America during H1 FY21 when compared with an equivalent period of 2020.
• Moderate Improvement in Working Capital Efficiency: The working capital/sales had improved to around 20.7% for the 12 months period ended June 2021, while it remained 23.2% during FY20.

(Source: Company presentation) 

Key Risks

• End Market Risks: The Company may witness a significant drop in revenue & demand levels due to an unplanned reduction in production levels by the customers.
• Business Interruptions: VSVS may face a loss in production capacity due to disruption in the manufacturing process or physical site damage.
• Inflationary pressure of Raw Materials: The Company had faced several inflationary pressures regarding a surge in raw materials cost and freight cost. Moreover, it will have an adverse impact on the bottom-line profitability.
• Product Quality Failure: The product or application failure would lead to adverse financial impact or reputational damage of being a technology leader.

Now, we will analyse the Key Fundamental Statistics & Shareholding Pattern of Vesuvius PLC.

Cevian Capital (UK) LLP is the most significant shareholder as it holds nearly 57.25 million shares as of 30 June 2021.          

H1 FY21 Financial & Operational Highlights (for the six months ended 30 June 2021, as of 29 July 2021)

 (Source: Company result)

• The top-line revenue had shown a moderate jump of around 12% from £720.0 million during H1 FY20 to £808.1 million for H1 FY21.
• On the profitability front, VSVS’s operating profit grew by around 72%, and the profit before tax rose by approximately 89% during H1 FY21.
• With regards to the balance sheet, the Company had managed to bring down the net debt from £229.7 million as of 30 June 2020 to £196.6 million as of 30 June 2021.
• On the leverage front, the net debt to EBITDA has shown a decent improvement to 1.1x as of 30 June 2021, while it was 1.2x as of 31 December 2020.

Share Price Performance Analysis

 (Source: Refinitiv; Analysis done by Kalkine Group)

On 09 August 2021, at 08:00 AM GMT, VSVS’s shares were trading at GBX 552.00, down by around 0.36% from the previous day closing price. Stock 52-week High and Low were GBX 595.00 and GBX 380.20, respectively.

From a technical perspective, VSVS is trading above the 20-days exponential moving average of GBX 538.60, indicating an upside potential in the stock price. Moreover, the MACD line remained above the signal line, indicating a bullish stance in the stock price.

Over the last one month, VSVS’s stock price has delivered a positive return of ~2.84%, and it has outperformed the FTSE 250 index (benchmark index) with a return of about 2.28% and FTSE All-Share Industrial Engineering index (benchmark sector) with a return of about 2.32%.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

The Company had shown decent improvements in end markets and gained significant market share in Steel & Foundry business segments. Thus, VSVS had delivered strong commercial performance during H1 FY21. However, the Company remained wary of the inflationary pressure on the raw materials. Nonetheless, VSVS remained confident that the increase in the selling price would offset the inflationary worries. Moreover, the Company had expected H2 FY21 trading profit to match the levels achieved during H1 FY21. The Company would continue to seek lucrative organic growth opportunities across both business segments. Overall, the Company remained confident of achieving long-term growth for the shareholders boosted by the optimised manufacturing footprint, new product pipeline, and ongoing R&D investment.

Considering the strong H1 FY21 commercial performance, 12 new product launch during H1 FY21, capacity augmentation, robust top-line & bottom-line business growth, strong dividend yield, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Vesuvius PLC at the current price of GBX 552.00 (as on 09 August 2021 at 08:00 AM GMT), with lower-double digit upside potential based on 18.55x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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