Vesuvius Group PLC

FTSE-250 listed Vesuvius PLC (LON: VSVS) provides molten metal flow engineering and technology services. It serves the steel and foundry industries.

Rationale for Valuation – BUY at GBX 461.80

• Despite the shortage of micro-chips, the UK’s manufacturing output increased by 1.8% in the Q2 2021, reflecting strong demand scenario economy reopens.
• Merck’s game changing Covid-19 pill can reduce hospitalization by half, which can bring workers back to work and reduce supply chain issues.
• During H1 FY21, VSVS optimized manufacturing footprint established a new product pipeline and continued R&D investments to build a platform for further financial improvements.
• The incremental selling price shown structural growth in its end markets of steel and foundry.
• There was a 100% improvement in the interim dividend, reflecting confidence in the optimized manufacturing footprint, new product pipeline, and ongoing R&D investment to generate substantial value for its shareholders.
• On a forward 12-month basis – EV/Sales, EV/EBITDA, Price/Earnings, Price/Book, and Price/Cash Flow valuation multiples are undervalued against the median of the Industrials sector.
• From a technical standpoint, the momentum oscillator RSI (~13.77) is in the oversold zone, while the stock price is hovering close to the lower Bollinger Band.

Key Risks

• British’s final manufacturing Purchasing Managers' Index sank for a fourth month in a row in September 2021 to 58.6 in September from August's 61.4.
• The sluggishness in factory activity with the supply chain disruption and inflationary market conditions can impact the Company's growth prospects.
• The increase in selling prices offset the raw-material costs; however, it didn’t fully mitigate the freight costs in H1 FY21. The resurgence in delta coronavirus variant can exacerbate the supply chain disruption and impact profitability margins.
• There is a likelihood of revenue reduction from reduced end-market access amid a complex and changing regulatory environment.

Interim Results (for the half year ended 30 June 2021, as on 29 July 2021)

 (Source: Company Website)

• VSVS continued robust working capital performance and improved Net Debt/EBITDA to 1.1x at the end of H1 FY21 from 1.2x at FY20 end.
• During H1 FY21, revenue jumped 18% year-on-year on an underlying basis, reflected recovery in Steel and Foundry Divisions.
• Similarly, trading profit soared 54% year-on-year in H1 FY21 to £73.3 million.
• The Group recommended a 100% increase in interim dividend from 3.1 pence in H1 FY20 to 6.2 pence in H1 FY21.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion 

During H1 FY21 Vesuvius has reinforced its technology leadership, increased penetration of value-creating solutions, captured growth in developing markets, and improved cost margins. Moreover, it demonstrated a solid commercial performance in H1 FY21 on the back of market share gains and continued improvement in end markets. With incremental selling price, the trading profit in H2 FY21 is expected to be similar to H1 FY21. However, it also continued to experience inflationary pressure pertaining to raw materials and freight.

Beyond FY21, continuing structural growth in end markets shall present attractive organic growth opportunities. The stock made a 52-week High and Low of GBX 595.00 and GBX 387.40, respectively.

Based on the strong commercial performance, end markets recovery, incremental selling prices, market share gains, upcoming growth opportunities, and favourable valuation conducted above, we have given a “BUY” stance on Vesuvius Group PLC at the current market price of GBX 461.80 (as on 5 October 2021, at 12:25 PM GMT+1), with lower double-digit upside potential based on 16.64x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.). 

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

*The reference data in this report has been partly sourced 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 or if the price closes below the support level (indicative stop-loss price).

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332. Kalkine Limited is authorised and regulated by the Financial Conduct Authority under reference number 579414.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation.

Kalkine does not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation. Kalkine’s non-personalised advice does not in any way endorse or recommend individuals, investment products or services for your personal financial situation. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional authorised financial planner and adviser. You should be aware that the value of any investment and the income from it can go down as well as up and you may not get back the amount invested.

Kalkine Media Limited, an affiliate of Kalkine Limited, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.