Share of the Week: A breakout to record high

It’s a company that’s already been a winner for some. Companies analyst Richard Beddard had seen Victrex (VCT) return a tidy 34% for his Share Sleuth portfolio in just eight months up to 10 August. In his next update, that figure will be much higher.

That’s because the manufacturer of PEEK, a tough and light polymer used in components for cars, aircraft, consumer electronics and a wide range of industrial products, has seen its share price surge 14% this week to a record high 2,356p.

It’s due primarily to an announcement Monday that Victrex now qualifies to take advantage of the UK’s Patent Box tax legislation, which allows companies to apply a lower corporation tax to profits earned after 1 April 2013 from its patent inventions. Its effective tax rate for the current financial year to 30 September 2017 is expected to reduce from 21% to 12%.

While Victrex’s patent for PEEK expired in 1998, it says it has a “strong history of research and development (R&D) and of patenting our intellectual property (IP)”.

“Victrex’s strategy of moving downstream from Polymer to Parts, and further differentiating our business through product leadership, will continue to be supported by our approach to R&D investment, to innovation and IP protection.”

It will benefit from an ongoing favourable impact on earnings per share (EPS) and cash, although no cash benefit will be seen in FY17, we’re told. Brokers say the tax break will add 9-10% to EPS.

As well as adding that 9% to forecasts of both EPS and dividends per share (DPS), UBS also ticks up its price target by 9%. That takes it to 2,220p, so with a ‘neutral’ rating, still only sees the stock as “fairly valued” on a forward price/earnings ratio of 17 times and free cash flow yield of 4.5%.

Analyst Andrew Stott says this is due to “recovery prospects in… oil & gas and aerospace [markets]… counterbalanced by risks in electronics, auto and healthcare”.

Victrex added that trading “continues to be comfortable with current expectations”, despite an expected impact from Hurricane Harvey in Texas. Liberum’s Adam Collins expects December’s full-year results to be accompanied by a 50p special dividend.

Meanwhile Jakob Sigurdsson, Victrex’s CEO-elect, joined the company on 1 September. He will work through a six-month transition with long-standing boss David Hummel and join the board on 1 October. The Icelandic former Promens chief will meet sell-side analysts at the end of September.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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