Volex AIM:VLX, the AIM-listed, Basingstoke-based electronics components manufacturer will publish its results on Thursday (22nd June) .
As previously reported, Volex set itself an ambitious target of GBP1bn revenues by 2027. The company seems to be on the right track to achieve this objective. In its last update, Volex said that in the year to 2nd April 2023, its revenue was expected to be at least USD710m (GBP555m) an increase of 15.5% on the year before.
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Volex is maintaining a strong margin with expectations of profits of at least USD66m – 17.4% higher than in 2022 – with both revenue and profit ahead of market expectations.
The share price has reflected the positive sentiment around the company, opening the week (19th June) at 285.25p and offering a year-to-date return of 12.4% and a one-year return of 17.5%, with shares ranging between 198p and 325p over a 52-week period, so its current share price is somewhere in the middle of its year’s range. The company has a market cap of GBP450m.All in Volex has continued its positive momentum and made good progress in the last year. It’s success is reflective of the industry it serves.
As reported, Volex specialises in the manufacture of power cords and cables, and provides integrated manufacturing services, such as box builds, wire and cable harnesses, electrical control panels, electromechanical assemblies and systems, printed circuit board assemblies, and ruggedized harness and overmoulding, as well as high mix and low volume manufacturing.
The AIM-listed company’s main markets are North America, Europe and Asia. Headquartered in the UK and operating from 19 manufacturing locations with a global workforce of over 7,800 employees across 22 countries, Volex products are used in domestic appliances, medical equipment and most-interestingly, electrical vehicles (EV). As the digitisation of society gains momentum, Volex products will be used in more and more applications.
EVs key to Volex’s growth
The focus on EVs has been key to Volex’s growth, with its business keeping pace with the growth in the rollout of EVs in developed markets, as the global trend to decarbonise and transition to more sustainable forms of energy grows apace.
In April, management secured a new contract with an (as yet unnamed) EV manufacturer in North America, and will service the contract – expected to be more than USD30m from 2024 – from its manufacturing plant in Tijuana, Mexico. As a result, Volex doubled its capacity in Tijuana to deal with anticipated demand. Tijuana becomes the company’s fourth site to be dedicated to EV service and support, with manufacturing plants in Poland, India and Indonesia also manufacturing EV charging components.
The company has also been spending on marketing to clients in the Complex Industrial Technology and Medical sectors, subsectors that, says management, have also significantly contributed to the firm’s underlying revenue.
Cutting debt
The increase in revenue has contributed to Volex’s cash reserves, with operating free cash flow in the second half of the year, substantially higher than the first half. After capital investment, dividend payments and acquisition costs of approximately USD46m, net debt weighs in at around USD76m, which Volex managed to reduce by US22m from its half-year position. This represents a covenant leverage of 1.0x, comfortably below what the management says is its target leverage corridor.
Backstopped by strong organic growth, despite tough trading conditions, Volex has an active acquisition pipeline, albeit not having bought anything since its acquisition of a majority stake in inYantra Technologies in March 2022 for USD13m.
That said, with its cash reserves and over USD75m of debt to play with, the potential for value-accretive or opportunistic acquisitions remains strong. inYantra, an Indian company, manufactures printed circuit boards in Pune, near to one of Volex’s biggest medical technology clients. Volex isn’t scared of buying to grow – having acquired eleven businesses since 2018. Stifel analyst, Annabel Hewson added that Volex had a shrewd approach with acquisitions, saying: “They don’t tend to get caught up in big auctions for companies. They look for ones a bit below the radar – normally family sellers.”
Nat Rothschild, the firm’s chairman said in a statement recently: “I firmly believe that Volex’s diverse global footprint, ongoing investment plans and reputation for excellence will continue to drive ongoing outperformance versus our competitors. This, combined with our robust balance sheet and healthy cash generation, means that the group is well positioned as we enter the new financial year.”
Volex is running hot at the moment, and its stated ambitions and recent performance would indicate it is a share that you should have in your portfolio. However, the company is aiming high, and as it approaches that GBP1bn revenue target, each year will be harder to maintain that 15% revenue growth number.
Market challenges
The company still has some existential challenges. A large part of its revenue is still derived from the consumer goods sector, manufacturing cabling and boxes for white goods manufacturer, which have taken a hit over the last year, as hard-pressed consumers decide to mend-and-make-do with large capital purchases like a washing machine, as opposed to buying a new appliance.
Inventory has been an industry-wide issue since the end of the Coronavirus pandemic, and Volex’s relatively small size doesn’t give it the buying-power of some of its larger competitors. Moreover, given the pace which interest rates have been rising in the past twelve months, that debt must be creating its own problems in terms of repayments. Coupled with its internal investments, there is going to be a lot of pressure building on the company’s finances if it wants to maintain its momentum.
Volex is an ambitious smaller company; the targets it is setting itself are achievable, but will test management in the next four years.
Bridgewise rates Volex as a ‘Hold’. The analyst said: “Volex published its Q3 report on Nov 9th, 2022 with positive results, but no significant factors particularly remarkable relative to its peers. We do believe, though, that macro-related market conditions will influence the stock’s performance more significantly than its individual results. We gave Volex a 61 rating and a ‘Hold’ recommendation.”
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