Spe­cial div­i­dends on the cards at Vic­trex

A sig­nif­i­cant tax rate cut is ex­pected to reap re­wards for in­vestors if the com­pany has enough cash

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In­vestors should be ex­cited about poly­mer man­u­fac­turer Vic­trex’s (VCT) re­duced tax rate as it may re­sult in spe­cial div­i­dends go­ing for­ward. News the com­pany’s hefty in­vest­ment in R&D spend­ing has made it el­i­gi­ble for the UK’s Patent Box tax break trans­lates into a cut in the firm’s tax rate from ap­prox­i­mately 21% to 12%, which is ex­pected to have a favourable im­pact on earn­ings per share (EPS) and cash.

The cash ben­e­fit is ex­pected to kick in from 2018 on­wards.

Since the an­nounce­ment on 4 Septem­ber, shares in the com­pany have ral­lied nearly 8% to £23.35.

Vic­trex plans to pay a spe­cial div­i­dend if net cash hits £85m by the end of Septem­ber. In­vestors won’t find out if it has reached this thresh­old un­til full year re­sults are pub­lished on 5 De­cem­ber 2017.

Out of the 19 an­a­lysts that cover Vic­trex, 18 are fore­cast­ing a spe­cial div­i­dend in the year to 30 Septem­ber 2017.

Beren­berg’s Se­bas­tian Bray says there is the like­li­hood of ‘a spe­cial div­i­dend ev­ery year’ and up­grades his rec­om­men­da­tion to ‘buy’ on the back of the tax cut.

YIELD BOOST FROM TAX BREAK

‘The es­ti­mated £13m per an­num tax sav­ing from 2018 is likely to raise yields to 5% per an­num in the long term,’ com­ments Bray.

He an­tic­i­pates a head­line up­lift to EPS by 10% to 11% and flags that Vic­trex will have enough cash to fund fur­ther bolt-on acquisitions.

Vic­trex makes high per­for­mance poly­mer prod­ucts used in a broad range of mar­kets in­clud­ing automotive, aerospace, elec­tron­ics and med­i­cal.

Ac­cord­ing to Bray it will ben­e­fit from an end mar­ket that is ‘near uni­ver­sally pos­i­tive for vol­umes’, while its in­no­va­tive pipeline leaves ‘con­sid­er­able up­side to the cur­rent price’.

N+1 Singer an­a­lyst James Tet­ley be­lieves the spe­cial div­i­dend could be 50p apiece in 2017 and 2018.

Vic­trex is cur­rently fore­cast to gen­er­ate net cash of £105.5m this year, which is an­tic­i­pated to in­crease to £109.9m in 2018.

RISK WARN­ING

Al­though it is a cash-gen­er­a­tive busi­ness with no debt, there are risks. Weak­en­ing de­mand in key mar­kets, in­clud­ing the aerospace and elec­tron­ics sec­tors, could im­pact its abil­ity to be so gen­er­ous to share­hold­ers.

The com­pany cur­rently trades on a fore­cast 18.9 times EPS in 2018.

Though this is a high val­u­a­tion, Bray notes Vic­trex is among the fastest grow­ing con­stituents in the UK chem­i­cals sec­tor with a fore­cast EPS com­pound an­nual growth rate of 11% be­tween 2017 and 2019.

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