Berenberg lowers target price on Victrex following 'cautious' Q3 update

Berenberg lowered its target price on speciality chemicals outfit Victrex from 2,250p to 2,200p on Friday, stating the group's "cautious" third-quarter sales update brought it "one step closer" to the end of the downgrade cycle, but adding that it was "not there yet".

Berenberg's analysts noted that if anything, Victrex's third quarter appeared to have been "sequentially worse" than its second, with volumes falling 21% to 912 tonnes of PEEK polymers in the quarter, driven by a broad-based weakness in the autos, electronics and industrial end-markets.

However, Berenberg said there was "a way back to reliable volume growth" for Victrex, but said it involved "a cyclical upswing that is unlikely to materialise in the next few months".

The German bank cut its earnings per share estimates for 2019 by 6%, primarily reflecting the aforementioned lower volumes, while noting that its downgrade to 2020 numbers was less, owing to "more-favourable FX".

Looking forward, Berenberg said Victrex will see "very easy comparable numbers" after the fourth quarter and benefits from dividend support. The analysts also pointed out the Victrex was "an obvious beneficiary" from any GBP depreciation that would accompany a hard Brexit.

"We believe that Victrex's core volumes are likely to normalise at mid-single-digit percentage levels from 2020. We also think that its commercialisation of the downstream pipeline will be successful. In the short term, however, the valuation is full, and non-FX-related earnings upgrades unlikely to materialise," said Berenberg.

The analysts concluded by saying Victrex's 17x 2020 price/earnings ration, in long-run averages, was "not a compelling valuation level for a cyclical name with mid-single-digit earnings growth", leading it to reiterate its 'hold' rating on the stock.