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

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

Timing – TBC

Agenda -

Paul’s Section

blank at the moment, I had a lie-in

Jack’s Section

Volex (LON:VLX) – ‘ahead of expectations’ for this acquisitive cable assemblies company (also includes comments from Paul, after Jack’s report)

Anglo Asian Mining (LON:AAZ) – gold, copper, and silver miner with production update at the lower end of guidance but some significant exploration assets

Polar Capital Holdings (LON:POLR) – fund inflows and positive momentum for this growing asset manager, plus a c5% forecast dividend yield


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.

Paul’s comments on Volex (LON:VLX) (I hold)

I managed to negotiate a lie-in this morning, which was wonderful, so read the trading update from Volex (LON:VLX) (I hold – it’s my 3rd largest position behind Boohoo (LON:BOO) and Saga (LON:SAGA) ) at 7am, then went back to sleep, expecting to wake up and find it up by 20-30p. In reality, the price has barely moved, which surprises me, since it’s an ahead of expectations update. Ah well, the market continually surprises me, and it doesn’t really matter for a long-term, “coffee can” share like this.

The only point I would add to Jack’s report, is re the price of copper. This has indeed shot up in recent months, and is a large input cost for Volex. In previous webinars this has been queried by investors. Management indicated that they part-hedge the price of copper, as required. Also the customer contracts are set up to include quarterly, or annual, price changes to reflect the price of copper. Therefore the worst that can happen is a temporary hit to VLX profits if the price of copper shoots up, and a temporary benefit when it goes down. The amounts involved don’t seem to be large – if they were, then it would have missed H2 profits, rather than beating expectations. So it looks safe to cross that off the list of risks.

Growth from electric vehicles looks potentially exciting. Achieving $52m revenues in FY 03/2021 from this segment must only be the tip of the iceberg of opportunity, since the switch to EVs has really only just begun. It wouldn’t surprise me if we could put a zero on the end of that number in say 10 years time. I can’t see demand for data centres reducing either, because more amp; more things move onto the internet, and downloads get bigger (e.g. video, films, podcasts, etc)

De-ka was quite a big acquisition, and only contributed a few weeks trading into the FY 03/2021 Pamp;L. So a full year’s trading consolidated into the group accounts for FY 03/2022, should drive EPS up quite a lot on its own, before any organic growth, and more acquisitions in the pipeline. I really like that Volex is now self-funding its acquisitions, and ended the period with minimal net debt. I see it as one of those lovely self-funding growth stocks where disciplined, good value acquisitions, fuel growth without hopefully needing to issue any significant number of new shares from now on. We’ve previously been told to expect more acquisitions fairly soon.

Competent management with lots of skin in the game is another positive aspect of this share, and a key item on my wishlist for companies that I hold long-term. They’re just better, more carefully managed, usually, I reckon.

Broker update – thank you to N+1 Singer for making an update available to us today, on Research Tree, it’s so helpful. The $41m profit for FY 03/2021 is 5% ahead of their forecast, which should have propelled the share price higher today, but hasn’t for whatever reason – maybe short termists are banking their gains? My shares are certainly worth more to me today, because I have up-to-date information showing the company has beat expectations, which I didn’t know yesterday.

For the current year, N+1 is forecasting 24.6 US cents, converting at £1 = $1.38 that becomes 17.8p, for a PER of 20.4, which I think is a perfectly reasonable valuation for a successful, acquisitive group, in growth markets. The forecasts seem to be set quite low, and with more acquisitions coming through, I reckon we can probably work on actual EPS being at least 10% more than this low target. Hence I reckon the real PER could turn out to be something in the high teens, which is a reasonable price in my view. Hence I’m expecting “trading ahead of expectations” updates periodically in the next year. A V-shaped recovery from covid around the world, due to massive Govt stimulus, is another reason to be increasingly optimistic. I’ve not seen any profit warnings for a while, nearly every company I report on at the moment seems to be meeting or beating expectations. That drives my increasing optimism, facts and figures being reported, not any tea-leaf navel-gazing! (is that a thing?)

My opinion – I’m very happy with this update. So my Volex shares go back into the coffee can for another year. Maybe the really big re-rating of this share has mostly happened now? I think it’s more realistic to expect a share price rise of maybe 20% p.a. from this point on. It depends though. If he’s bolting on acquisitions at a purchase price of say 7 times EBITDA, and has a share price rated at a PER of 20, then each acquisition automatically fuels further share price rises. That’s how shares like Judges Scientific (LON:JDG) and Sdi (LON:SDI) have done so well, and to a lesser extent, Tracsis (LON:TRCS) . Volex probably has more synergies than JDG too.

Overall, I think this is a very good share, still sensibly priced. The big rise in price in recent years looks fully justified by the great improvement in fundamentals. That’s a more solid foundation than the excessive multiple expansion which has driven many other shares too high, in my view. It wasn’t long ago that this group was a basket case, but radical action by Nat Rothschild has transformed it.

There’s a modest c.1% dividend yield too, nice to have.



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.

Polar Capital (LON:POLR)

Share price: 740.8p (+2.46%)

Shares in issue: 98,745,668

Market cap: £731.5m

Another company that breaks the small cap rules here but I can see a couple of readers requesting Polar Capital Holdings (LON:POLR) and it is held by the Stockopedia Investment Club as well so for those reasons I’d like to take a quick look.

This is a specialist asset management group with a great long term track record in Tech and a few other areas. There are a couple of quality asset managers out there. Liontrust Asset Management (LON:LIO) comes to mind, and Polar is another in my view.

AuM update


  • As at 31 March 2021 assets under management (AuM) were £20.9bn compared to £12.2bn at the end of March 2020 (+71% year-on-year).
  • This growth comprised net subscriptions of £2.1bn and inflows from acquisitions of £1.7bn, offset by outflows from a previously reported fund closure of £0.3bn and an increase of £5.2bn related to market movement and fund performance.

Gavin Rochussen, Chief Executive, comments:

We are pleased to report a good finish to the financial year in terms of flow momentum with net inflows into 14 of our funds amounting to £643m in the quarter ended 31 March. The fact we have also increased our AuM to over £20bn, doubling the size of our business over three and a half years, is testament to our strategic focus of offering a diversified range of funds whilst maintaining a rigorous focus on performance and active management.

On a three-year annualised basis, 78% of AuM has performed ahead of benchmark at the end of March… The net inflow momentum of the last quarter has continued into the first two weeks of April.

The group does add that 57% of its funds are outperforming the benchmark year to date, which is lower than the three-year annualised figure. So there’s a question to answer there. We’ll be getting more detail on 1 July 2021, when results for the financial year come out.


This looks like an encouraging AuM performance from Polar, with total AuM up 71.6% to £20.9bn in the twelve month period. In comparison, Premier Miton recently revealed £12.6bn of AuM for its second quarter, meaning total AuM went up by 38.5% over a similar period.

Polar has a lot of exposure to US Tech so that’s either a bull or bear point depending on your view there. Premier Miton leans more towards UK small caps. A big US Tech sell off could be a risk.

The integration of the Dalton business onto the Polar Capital platform continues according to schedule and is anticipated to be completed by the financial half-year end.

Polar’s shares have rerated recently but the valuation is still undemanding (but probably no longer outright cheap) given the group’s momentum, forecast yield, and quality / profitability metrics.




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