Vesuvius 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 431.60

• Acquisition: The acquisition of Universal Refractories holds strategic importance for Vesuvius. It will significantly expand the North American presence and strengthen the Foundry business.
• Improved Dynamics: Despite the cost pressure, the UK Manufacturing Purchasing Managers' Index (IHS Markit CIPS) rose in November to 58.1 from 57.8 in October. Moreover, there is a steady improvement in the labour market.
• Solid Trading and Demand: The revenue growth to October was in line with expectations despite the weakening of auto end markets. Moreover, the demand dynamics for steel and foundry end markets remained strong.
• Growth Drivers: Vesuvius also continued to launch new products since H1 FY21 to gain market share and improve margins. Adjacently, the expansion of Steel Flow Control capacity is progressing well.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, Price/Earnings, Price/Book, and Price/Cash Flow valuation multiples of VSVS are undervalued against the median of the Industrials sector.
• Technical Indicator: From a technical standpoint, 14-day RSI (~36.30) is around the oversold position, while the stock price is close to the lower Bollinger Band.

Key Risks

• Macroeconomic Risk: The slowdown in the Chinese economy (China’s factory inflation topped 26-year high in October 2021), supply chain snags, acute power shortages, sluggishness in factory activity, and inflationary market conditions can impact the Company's growth prospects.
• Subdued Factory Activity: British factories are witnessing sluggish growth amid soaring costs as they are struggling with supply bottlenecks. Due to freight capacity problems, Companies can also face order cancellations or delays.

Recent News

Acquisition: On 2 December 2021, Vesuvius acquired Universal Refractories, Inc. The transaction was conducted for US$57.1 million, on a cash and debt-free basis.

Trading Statement (for the period from 1 July to 31 October 2021, as on 11 November 2021)

• Price Increase: In order to offset increase raw-material and freight costs, the Group increased prices.
• Financial Position: Despite interim dividend payment and short-term investments, FY21’s leverage (Net Debt / LTM EBITDA ratio) is expected to be in-line with its level of 1.1x.
• Guidance: FY21’s trading profit is expected to be in line with current analyst expectations.

One Year Share Price Chart

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

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

Conclusion 

Vesuvius has reinforced its technology leadership, increased penetration of value-creating solutions, captured growth in developing markets, and improved cost margins. Moreover, 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. The stock made a 52-week High and Low of GBX 595.00 and GBX 408.80, 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 PLC at the closing market price of GBX 431.60 (as on 3 December 2021), with lower double-digit upside potential based on 14.59x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Industry Information have been taken from REFINITIV.

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

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

*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).

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