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MARKET COMMENT
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The chemical industry is one of the UK's largest manufacturing sectors, with annual sales of some £32b. The industry comprises a diverse range of companies of which the pharmaceuticals are the most high profile. However, there are some interesting companies within the mainstream chemical sector too. Our lives would be a whole lot duller without, say, the fragrances developed by ICI (LSE: ICI)(NYSE: ICI). Yule Catto (LSE: YULC) helps to brighten up our days too, with the many vivid pigments that are used in products such as hair dyes. Then there are the industrial gases bottled by BOC (LSE: BOC) and the hardwearing chromium produced by Elementis (LSE: ELM) that adds a sparkle to our bathroom taps. The chemical industry is one of the faster growing sectors in the UK. It is estimated to have grown by an average of 3% per year over the last decade, outpacing the 2.2% growth of the UK economy as a whole. That could suggest rich pickings for canny investors prepared to roll up their sleeves and experiment with the sector. Victrex (LSE: VCT), the high-performance polymer maker, is an interesting outfit that catches the eye if only because of its extraordinarily high operating margin. Victrex's latest results showed that annual pre-tax profits rose 18% to £23m on sales of £72m. After adding back interest payments of just £0.3m, the operating margin works out at a mouth-watering 32%. Interestingly 30%-plus margins are the norm for Victrex. A healthy operating margin normally suggests strong pricing power, which appears to be the case with Victrex. Its proprietary PEEK polymer is used in cars, cables and even in medical implants. Victrex is not especially cheap, though. Its shares cost 346p a piece, valuing the company at 17 times forecast earnings for 2004. The dividend yield of 2.2% is not that generous either. Treatt (LSE: TET), whose shares trade at 204p, looks much better value. At this price, the shares value the business at 11 times 2004 earnings. The dividend yield of 4.2% is quite attractive too. Treatt is a merchant of natural oils that are used by the food, personal care and drug industries. Its vast products range spans some 3,000 products that include double-rectified peppermint oils to its Treattarome natural distillates. Micap (LSE: MIC) is a relatively new company that only floated on AIM this year. With its scant track record, valuing Micap is a little tricky. Nevertheless, Micap reckons that its patented technology to encapsulate tiny droplets of liquid around a continuous polymeric film should provide a solid platform for growth. Micap has a commercial licencing deal in place with the Swiss flavouring company Firmenich. It is also currently conducting feasibility studies with AstraZeneca (LSE: AZN) and a division of Boots (LSE: BOOT). However, Micap, which has a market cap of £16m, is not expected to be profitable until 2005, when pre-tax profits of £1.25m have been pencilled in.