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A significant tax rate cut is expected to reap rewards for investors if the company has enough cash
Thursday 14 Sep 2017 Author: Lisa-Marie Janes

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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