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

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

Jack’s section Volex (LON:VLX)

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.


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.

Anglo Asian Mining (LON:AAZ)

Share price: 122p (-8.96%)

Shares in issue: 114,392,024

Market cap: £140m

Anglo Asian Mining (LON:AAZ) is a perennially neglected gold, copper, and silver miner with a good management team who between them own a decent chunk of the business.

Shares have been rangebound for more or less three years now, so patience is required – it’s listed as Speculative but in truth, AAZ’s share price performance has been far less volatile than its listed small cap gold miner peers (both in terms of downside and upside).

The share price performance has been frustrating and a key producing asset has just been depleted, but AAZ has a few exploration assets it is scoping out that have potential.

It’s worth going into a little more detail on this point.

AAZ has recently gained three big mines. One of them alone produced 120k oz last year and has resources of 8m oz, which is potentially huge – by way of comparison, AAZ produced around 70koz in total last year.

The problem is AAZ now owns these mines as a result of a recent conflict between Azerbaijan and Armenia, which is hardly a stable state of affairs.

That aside, the size of AAZ has multiplied. Before it was really the mines at Gedabek and Gosha. And the group’s existing Ordubad assets also have exploration potential.

There are a couple of significant risks here. The big one is geographical, as alluded to above. With most of its mines in Azerbaijan and close to the border of Armenia, things can get tense and indeed this tension flared up into an outright conflict last year. As a holder, you need to accept this risk.

Stockopedia also flags AAZ for two short screens and gives it a high M-Score, picking up on a spike in receivables.

And of course, as a miner, AAZ’s performance is ultimately tied to the fortunes of the gold price.

The group needs a catalyst but at the moment the gold mining sector is valued lowly by historical standards, and you could argue that AAZ trades at a discount even to its peer group in terms of potential assets. I do view AAZ as a risky dividend-paying contrarian value stock with notable upside potential.

But recent production levels have been uninspiring and exploration assets must become producing assets.

That said, if you focus purely on management teams, I have a favourable impression of the crew here having listened to them speak a few times. There’s a lack of equity dilution and good alignment with shareholders.

Shareholders have had to be patient so far and today’s update shows they might have to be patient for a little longer. But the 120p line looks to have strong support so there’s every chance today could be a good buying opportunity in the long term.

Q1 production and operations review

AAZ produced 15,810 gold equivalent ounces (GEOs) calculated using budget metal prices. Full year production guidance is for between 64,000 to 72,000 ounces so this is below target.

11,907 of actual gold ounces was produced – 75% of total – with the balance coming from silver and copper.

Additional points:

  • Cash of $22.9m at 31 March 2021 (31 December 2020: $38.8m) and unsold gold doré and copper concentrate inventory of $15.2m,
  • Dividend of $1.7m paid in Q1 2021,
  • Balance of corporation tax for FY 2020 of $6.3m paid in Q1 2021.

AAZ forecasts FY21 gold production of 48,000 to 54,000 ounces, which is below FY 2020’s 56,864 ounces of gold due to the depletion of the group’s Ugur mine. Meanwhile, AAZ forecasts copper production of 2,500 to 2,800 tonnes of copper (FY 2020: 2,591 tonnes) and total metal production of 64,000 to 72,000 GEOs (FY 2020: 67,249 GEOs).

The exploration programme gave promising indicative results in 2020 and this process is continuing. The group hopes to reap the benefits of this exploration with production next year from Avshancli.

The drilling results from Zafer are encouraging and AAZ has engaged third party consultants to provide indicative estimates of resources.

Management is also going over the potential of the newly-restored contract areas following the resolution of the Azerbaijan-Armenia conflict. A recent visit to the Vejnaly contract area in Zangilan has identified some high grade ore stockpiles and the feasibility of transporting this ore to Gedabek for processing is being evaluated.

This could prove to be a really big point for shareholders in future.


There are probably two tracks to consider here: the shorter term results, which include the Ugur depletion and a Covid and conflict-disrupted 2020, and then the longer term potential of AAZ’s exploration assets.

Which of these is the more significant probably varies from investor to investor depending on risk tolerance and other factors.

No doubt AAZ has been a frustrating hold for some but if you tuck this away as part of a diversified portfolio, or have high conviction in the management team and have the patience to last through periods of underperformance, value should win out in the end.

That said, I am a little disappointed with this update. The group could do a better job of communicating with the market and managing expectations, as I’ve seen a couple of updates coming in at the lower end of forecast ranges.

The sale of 5,635 ounces of gold bullion sales at an average of $1,697 per ounce looks like a low price given average prices for the quarter, during which gold prices have for the most part been comfortably above $1,800 an ounce.

At some point shareholders might become exasperated, and there are some real risks to consider, but there is also value here for those that choose to go digging.



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