Stock Pitch - Volex (LON:VLX)

26th Nov '20 by Jack Brumby

30 comments 11659 reads

[Update: Volex was bought for the Club on 2nd December 2020 at a price of £2.72]

Volex (LON:VLX) was once regarded as a turnaround situation but now it is an acquisitive growth stock helmed by executive chairman and c25% shareholder Nat Rothschild, who has just bought more shares at 253p.

The group's stock price reflects quite a change of fortunes under new management, with strategic acquisitions successfully moving Volex up the value curve and paving the way for sustainably higher margins and cash generation.

This continued evolution away from recovery mode into a higher margin, cash generative global player aligned with structural growth end markets like data centres and medical devices is central to the pitch. It was presented to the Stockopedia Investment Club on 17 November.

Has the easy money been made here, or, with additional acquisitions on the horizon, is there more to come from this ambitious company?

TL;DR

Bull Points: Revenue growth and margin expansion; selective acquisitions in a fragmented global market; growing economies of scale and purchasing power; aligned with structural growth markets (medical devices, EVs, data centres).

Bear Points: Risky acquisition strategy and adjusted results; CFO has just left; scope for rising input prices (mainly copper); history of equity dilution.

Profile

Volex is an Adventurous Mid Cap High Flyer listed on Aim in the Industrials sector. It makes reliable cables for medical devices, data centres, electric vehicles, and domestic appliances.

Its share price is 261.7p, there are 152,250,802 shares in issue, and the market cap is £398.4m. The StockRank is 93, based on a Quality Rank of 92, a Value Rank of 37, and a Momentum Rank of 98.

Volex has a forecast PE of 15.5x and the forecast PEG is just 0.6x, meaning strong growth prospects justify a forecast PE ratio in the teens.

The forecast yield is small, at 1.33%, but is an important milestone in the group's ongoing recovery and transformation. With that forecast PEG of 0.6, Volex is very much a 'GARP' ('growth at a reasonable price') stock with earnings expansion fuelled by organic investment and careful acquisitions in a fragmented market.

Business & Model

What is the company history & what does it do?

The original business was established in Manchester in around 1892 and the 'Volex' brand…

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Paul Scott

27th Nov '20

Terrific report Jack, I love the layout.

In my most recent SCVR comments on VLX, I pointed out that broker forecasts look far too low, and hadn't yet been increased to reflect what looks an excellent pending acquisition of a business in Turkey which has low cost of production, high automation, and hence strong operating margins. This is being paid for out of the cash pile. Plus there's an enlarged bank facility giving them a warchest for more acquisitions - with 3 in the pipeline for likely Q1 2021 completion, according to a recent webinar.

So, it's still cheap (forward PER showing on StockReport as only 14.6 - and that's based on broker forecasts that are almost certainly too low. So the real PER could be high single digits possibly.

I think 400-500p is a sensible price target, once forecasts are raised, and allowing some multiple expansion too - I think a PER of 20 looks reasonable, now that operating margin is up to about 10%.

Exciting!

Regards, Paul. (Disclosure: one of my largest long positions, and I'm still buying)

M Madar

Thank you so much for this comprehensive update . I was literally about to buy it last week but got put off by the price of copper which has absolutely soared. Their margins benefited from copper prices falling when they had their last set of results and now the opposite is happening . Do they have the pricing power to pass this big cost increase through ? or are we about to see a big margin squeeze which the market is not pricing in ?

Malcolm Elliot

Volex is on my investment club radar

John Warrener

Good interesting report.

As I already have Volex shares in my portfolio I will keep them in spite of excellent growth already seen.

Quilleron

Worth looking at Volex (LON:VLX) 's recent HY results presentation on InvestorMeetCompany.com where I recall them saying that they do some hedging but also have contracts that include quarterly revisions based on the price of copper.

Anthony Beater

(LON: VLX) I already hold these shares and intend to stick with them. The encouraging signs from the Chairman point to plenty of involvement from the Board in the future of this positive climb in the shares.

Edward Croft

Volex is one of my favourite stocks right now. I am keen for us to repitch it at the next club meeting. I voted for it, but we got B&M instead. I'm long - third largest position. Keen to go longer when it re-kisses the 10w MA.

Stuart Wilson1

I'm glad I advised my son to buy Volex in March this year!

MiserableJacktPotato

I took an initial position of £1.8ish in each of Volex (LON:VLX) and £LOOP on Wednesday.

Felt I had to get out of Loop at 89p earlier today at ~40% loss, tempted to throw the balance into VLX.

All stocks are speculative and I've learned to trust none of them.

Nonetheless re. VLX:

Qualifies for the CAN SLIM and Zulu Screens. My 2 favourite screens.
Insider buying - Nat Rothschild bought another £250k at £2.53, and £825k at £1.65
Low PEG (0.5) and PE of 14.6 that is likely over-stated.
Very strong eps growth - quarter on quarter +115%, q on pyq +86% - forecast rolling +36%
High relative strength.
Sweet spot market cap wise -> £395m … where institutional investors get hungry.
Something new - market lust for all things datacentre, EV and medical related.
big breakout upwards on high volume… volumes have more than doubled etc.

As mentioned I'm waiting for sideways movement and/or correction back to 10 week moving average. I'm not that bullish on the broader market at the moment - cagey re. Brexit New Year and the economy next year.

Harry Hindsight

28th Nov '20

Great report format and useful to look back on when it all goes wrong (if right then you don't refer to your notes). The negatives are availability of materials (those 'green' things dug out of the ground) - China has been stockpiling the real stuff, not hedging. And China (again sorry) hopefully have upped their copy-cat lower quality offerings - perhaps a compartment fire extinguisher and kill switch like racing cars.

Not a problem for Volex short term - power to their business.

Wayneskie

29th Nov '20

Ed I am curious as to why you would add more when it kisses the 10W MA?

In my head I am thinking that the price is indeed rising, but it is not running ahead of itself (i.e. sticking closely to the 10W Moving Average).

Or is there another reason?

Rusty2

Is that the 10 week MA? Does not look like on the chart, seems to be 10 day?

Chart is a weekly chart with a 10 period and 30 period (week) MA

ridavies

I am always impressed when a company can move from commodity to bespoke, and often they do this by acquisition. Also, the markets they are in are certainly growth markets, and that s very attractive. Finally skin in the business - re Mr Rothschild - is always impressive. PS there was a similar company pattern some years ago which expanded into Scandinavia with acquisitions in Norway if I remember correctly. My memory serves me badly these days, but if it comes to anyone's mind I would be interested to hear. Began with an A I think and may included Electronics! Sorry to sound like a cryptic clue!

ken bishop

13th Dec '20

I am still in my early stages of membership of Stockopedia and I was pleased to see the depth of consideration given to the merits of Volex. I feel pleased that I made a purchase back in June but if B & M were considered a better bet then I must take a look at that one quite quickly.

carmensfella

Volex are one of the companies featured in the MelloBASH tomorrow evening

https://melloevents.com/mellomonday-14th-dec/

Charlie

26th Dec '20

As a newbie to investing found this a great report on Volex, very helpful for my decision making and made Volex part of my portfolio 24-12-20. Value could be better at 315 on todays price but the solid growth with PAM & business looks good.

I forgot to update this thread at the time, but as I grew more personally bullish on Volex, I re-pitched it to the club on the 1st December.

The Club voted unanimously to buy and we initiated a full sized position on the 2nd December at £2.72. I have updated the main pitch note above with the vote result.

CharMar

7th Jan '21

I held Volex for most of 2020, but sold on news that powerhouse FD Darren Morris had left. He was the tireless public face of Volex and the investment argument. Why has he gone? JB's reports on the Co have been excellent btw..

Stock Pitch - Volex (LON:VLX)

TL;DR

Profile

Business & Model

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Jack Brumby

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