Volex AIM:VLX, the Basingstoke-based electronics components manufacturer, is an ambitious AIM-listed company in a growth sector that aims to be raking in revenues of at least GBP1bn by 2027 with profit margins in the 9% to 10% range making it a small stock to watch.
Currently the shares are quite cheap. Volex is trading on 13.7x FY22F PER (13.7 times financial year 2022 forecast of performance) or a 9.2x EV/EBITDA (the EV/EBITDA multiple compares the total value of a company’s operations (EV) relative to its earnings before interest, taxes, depreciation, and amortization (EBITDA)).
Shares opened trading today (23rd August) at 294.7p. The company has traded between 209p and 494.7p over the last 52-weeks, offering a year-to-date return of -13.6% and a one-year return of -20.6% giving Volex a market capitalisation of GBP466.6m.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 over-moulding, as well as high mix and low volume manufacturing. It sells its products in 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.
Volex targets growth in EV market
The company has specifically targeted growth in the EV market, where it offers a range of EV charging products. The company has vertically integrated its production facilities to optimise its cost of production in its EV manufacturing lines – a result of its acquisition strategy of buying smaller companies to enhance its overall product offerings.
The result has been a growth in EV clients, a sub-sector where Volex enjoys the position of being the only global producer of grid cords with manufacturing facilities on three continents, so it has flexibility and close proximity to market where EVs are being manufactured and used.
The company said that to-date it has grown EV revenue organically, with very limited capital investment. However, given its strong financial position, the company said that EV products are a prime candidate for internal investment and expansion.
Acquisition strategy
Volex has grown quite aggressively through acquisition. At least GBP170m of the company’s GBP1bn revenue target will be M&A driven. The company’s chairman, Nathaniel Rothschild said that key to Volex’s strategy was the identification of smaller companies that produce key components and integrating them into Volex’s overall business. Rothschild said in a recent call: “Our acquisitions made during Fiscal Year 2022 are integrating well, and Volex continues to develop a strong acquisition pipeline to drive growth.”
Rothschild joined Volex as a non-executive director before segueing to executive chairman and is the largest shareholder in Volex through his investment company NR Holdings Ltd.
Rothschild elaborated: “We will continue to re-deploy capital, as we generate free cash flow, into high-impact cash-generative acquisitions. We will continue to strengthen our market-leading positions in cable assemblies and power products while broadening our overall portfolio, with a clear eye towards ensuring long-term, sustainable positions in attractive markets around the world.”
Making acquisitions is a critical part of Volex’s recent history, and the company has acquired ten businesses since 2018. The additions to the Volex portfolio include: MC Electronics, Silcotec Europe, GTK UK Ltd, Ta Hsing, Servatron, DE-KA, Irvine Electronics, Terminal & Cable TC Inc., Prodamex, and inYantra Technologies which the company said “have allowed us to accelerate our pace of growth and diversification”.
The acquisition strategy is driven by the need to develop new technical capabilities for a growing customer list – this is especially the case in the EV sub-sector – where the company says it is: “moving up the ‘value chain’ by expanding our manufacturing capabilities and geographic spread, to become an indispensable partner to our customers by providing higher levels of service on a global basis.”
Volex completed the acquisition of Prodamex SA de CV and Terminal & Cable TC Inc. for a total cash consideration of CAD22.5m (GBP14.7m) in February. Prodamex has a factory in Mexico, whilst TC operates from a manufacturing plant in Canada.
Prodamex operates an advanced manufacturing facility serving customers in Mexico, USA, and Canada. It brings to Volex additional higher volume manufacturing capability in Central Mexico, complementing the company’s existing manufacturing plants in Tijuana and Juarez, providing customers with additional sourcing flexibility and production capacity.
With the acquisition of Prodamex, Volex will add a global domestic appliances harness business creating cross-selling opportunities and the potential for cost synergies on raw materials.
TC’s facility in Quebec, Canada provides Volex with ruggedised wire harness manufacturing capabilities focusing on the attractive “off-highway” market sector, supporting defence, industrial, agricultural and construction machinery customers.
Debt cushion
Volex has financed much of its acquisition strategy through the debt markets. In February Volex completed a refinancing exercise of its existing USD100m (GBP85m) revolving credit facility, tripling its facility to up to USD300m.
The new facility was structured through a syndicate of five banks and comprised a USD200m committed facility – split as a USD125m revolving credit facility and a USD75m term loan – with an additional USD100m accordion facility callable on demand. The renegotiated facility has an initial maturity date of February 2025, with the possibility of two one-year extensions.
The facility has a borrowing cost of 200 basis points over Secured Overnight Financing Rate, compared to 230bps over the aggregate of SOFR plus a credit adjustment spread under the prior facility. The facility also benefits from more relaxed financial covenants to provide increased flexibility to accommodate future acquisitions.
The refinancing will provide Volex with increased liquidity to support its growth strategy of further investment in organic and inorganic growth opportunities.
Jon Boaden, chief financial officer said: “The new facilities strengthen our ambitions to deliver sustainable growth as we continue to perform robustly, successfully navigating the current supply chain challenges while demonstrating our ongoing ability to pass through inflationary cost increases.”
However, in a climate of increasing interest rates, a growth strategy anchored on plentiful, cheap debt availability is a risk.
Ambitious but achievable
Volex has made quite punchy statements about its future prospects. Analysts at Canaccord Genuity recently lowered their target price on integrated manufacturing specialist Volex from 440p to 380p, stating the group’s five-year plan was “ambitious but achievable”.
In terms of the group’s five-year plan, Canaccord said Volex’s new 2027 targets would take revenue to USD1.2bn, with a 9-10% margin range, with at least USD200.0m of this revenue target to be M&A driven. “This means Volex would require revenue to grow by 10% CAGR to reach its organic target (USD1.0bn), which in our opinion provides an ambitious but achievable goal. We think pricing power, production efficiencies, and accretive M&A mean margin ambitions could prove to be prudent, albeit we are cognisant that EV growth will likely dilute the mix,” said Canaccord.
While the Canadian bank maintained operating margin expectations for Volex’s 2023 and 2024 trading years, which were set towards the bottom of the company’s 2027 target range, it also noted that higher interest charges had driven adjusted pre-tax profits 2% to 3% lower and guidance that the firm’s tax rate will increase also resulted in a roughly 10% adjusted earnings per share reduction for both years.
Canaccord maintained its ‘Buy’ rating on the stock.
Current performance
In its latest public statement on Friday (19th August) ahead of its AGM, Volex said its financial performance in 1Q22 had been strong and in line with its expectations. In the three months ending June, Volex said revenue grew organically by 4.9% as a result of positive customer demand and the firm’s ability to deliver against a “challenging” supply chain environment.
Rothschild said the company expects to deliver full-year underlying profit in line with current market expectations, though he acknowledged it was still early in the year, estimating underlying operational profit of between USD62.3m and USD64m. The financial year previously Volex reported operating profits of USD56.2m.
With full-year revenues up 39% according to the last full-year’s results published in June to USD614.6m and EV revenue up 96% to USD104.2m and underlying profits up 24% to USD51.4m, the company has had a record year, Volex certainly has momentum.
Rothschild said: “With excellent long-term prospects from organic growth and acquisitions, we are confident in our strategy, our operating model and our ability to create further shareholder value. Therefore, while we remain mindful of the challenges faced by all manufacturing businesses from continued extended lead times in the global supply chain, we are today reaffirming our outlook for the remainder of the year.”
