Small Cap Value Report (Thu 15 April 2021) - VLX

Good morning, it’s Paul and Jack here with the SCVR for Thursday.

Share price: 365p (pre-open)

Shares in issue: 152,044,226

Market cap: £555m

(I hold)

Volex (LON:VLX) has outgrown the SCVR to a degree over the past few months thanks to its strong share price performance and ongoing acquisitions. It’s a global supplier of integrated manufacturing services and power products.

So over a two-year period, the group’s shares have returned 256% compared to the All Share Index return of 0.22%.

Not bad going – but what’s of more interest going forwards is the continued ambition and deal-making nous of executive chairman Nat Rothschild (who owns about 25% of the company) and the scale of the global cabling market Volex is growing into. Simply put, there could be plenty more runway for growth here – assuming, of course, that acquisitions continue to be bought at reasonable prices and integrated competently in future.

Trading results

Helpfully, the group notes that more detailed full year results will be given on the 17th of June.

Trading in the second half of the financial year was ‘robust’, with strong demand from customers in the consumer electronics and electric vehicle markets. Electric vehicle customers contributed $52m of revenue, up 187% year-on-year.

The core medical and industrial markets have stabilised and the data centres business is showing healthy y-o-y growth as the trend towards home-working continues. Will this trend continue post-lockdowns? That’s a question to bear in mind, but Volex is exposed to plenty of other structural growth trends so it should be able to handle a degree of mean reversion here.

As a result, revenue for the full year will be ahead of market expectations and be at least $440 million while underlying operating profit is expected to be at least $41 million, ahead of the most recently guided range.

There are still Covid-related operational challenges but, harking back to early last year when Covid was becoming a global issue, it’s fair to say the impacts have not been as severe as many feared given the group’s China operations.

Volex’s most recent acquisition is De-Ka, which was flagged last year and was completed on 18 February 2021. Its integration appears to be going smoothly, sales and profits are ‘significantly ahead’ year-on-year, and it will be an important addition for the group’s strategy of ‘creating the most efficient and lowest cost global producer in the industry.’

Group net debt (excluding lease liabilities) will be approximately $6 million and management continues to advance targeted investment opportunities.

A dividend of no less than 2.2p per share is expected for FY21.

Conclusion

It’s an ‘ahead of expectations’ update later on in the year so holders will be pleased. Knowing the company, there will be further Mamp;A-related news flow this year and it looks like the group’s core markets are trading well. So we could see both organic and acquisitive growth drive the share price.

Robust demand in the electric vehicle and consumer electronics markets underpinned the H2 performance and the group is well placed to deliver on the next stage of its development.

And given Volex’s performance over the past year it does look like the group is executing as best it can.

Broker EPS forecasts for FY21 are currently 20.9 cents, or about 15.17p depending on the exchange rate used in the accounts, which would value Volex at 24x forecast earnings. These forecasts need to be upgraded though.

The group guides towards $41m of underlying operating profit. Looking at FY19 and FY20 an average of 78% of the operating profit translated into net profit. So using that figure would make for FY21 net profit of $32m or £23.2m, or 15.3p of earnings per share.

That’s not much more than existing forecasts, so I take that to mean we can expect better margins this year.

Meanwhile the group has a couple of nice tailwinds: end markets in structural growth, good organic trading momentum, an active acquisition pipeline and solid Mamp;A track record, and a growing degree of margin expansion.

And results going forwards will benefit from a fully integrated DE-KA.

There are risks of course. Copper is a big input, and this type of cost is rising for a number of operators. It might become a concern across the board further down the line. On that note, the group comments:

Whilst we are now entering a more challenging inflationary environment, we aim to defend the significant margin gains we have made. Unless future lockdown measures severely disrupt our customers or operations, we are confident of further revenue and profit progression in FY2022.

I remain optimistic on the group’s prospects even given the already strong share price. Paul also holds this one so it will be interesting to hear what he makes of it.

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