Good morning!
Volex (LON:VLX)
My view on this one might be tarnished by my having sold out on the last set of results, which I thought were poor, and the outlook also poor. Debt had risen too high for comfort, and despite the company telling everyone that the level of debt was absolutely fine, they immediately afterwards did an $11m Placing in Dec 2013, having kept the share price up by doing a bullish roadshow about the recovery potential.
So they really do need to deliver the planned turnaround, as the market price is already factoring in improved results. Today's IMS is for the three months to 31 Dec 2013 (which is their Q3, as It's a 31 Mar 2014 year end). The key sentence says;
The Board is pleased to report that there are some clear, but early signs that the implementation of the Volex Transformation Plan announced in November is on track and beginning to deliver results. Group trading stabilised through the final quarter of 2013 and the Board anticipates full year results will be in line with expectations.
That might sound OK, but bear in mind that broker consensus forecast has been in decline for the last year, as the company has managed down expectations, and is now only a little above breakeven for 2013/14, at a forecast of about 1.5p EPS (remermber that Volex reports in $US so its figures need to be converted into sterling. See the useful Stockopedia graphic on the right, which shows how far broker forecasts have fallen this year.
Broker consensus is for a strong recovery in profits to about 7.2p next year, so even then the forward PER would be 16.5, so bear in mind that the share price here has already factored in a strong recover in trading, where in reality there are only tentative signs of recovery, as the company admits. I cannot see the logic for paying up-front for a recovery that may or may not happen - that seems like lop-sided risk:reward to me, but skewed against me.
There's nothing in the current update, nor the valuation, that changes my mind on this one - at the moment the turnaround is already priced in, and far from certain to actually happen.…
