LON:VLX | Volex - An Electrifying Prospect Or A Short Circuit

7th Feb '22 by TooBaldTooSoon

21 comments 2622 reads

I’ve been taking a look at Volex (LON:VLX) recently as I have been considering it as a contender for my next investment, but looking for some healthy input to my current review.

To give a little background, I started investing around a year ago with the intention to provide me a good return come my retirement (currently some 30 years away)! I’ve a portfolio of only 5 securities at present, and looking to put more eggs in more baskets. My biggest uncertainty generally is putting a valuation on a share.

So I have had my eye on Volex (LON:VLX) since July 2021 when I saw this at 368p. Given the EV market being a sector expecting to provide growth over coming years, and there being a noticeable increase in EVs on the road, their EV cabling business made me thing they would be worth a look.

At July 2021 I noted that FY 21 results showed operating profit growth of 35%. This was at a time when the medical arm of the business faced reduced trading due to Covid restrictions. Higher freight and copper prices were also a consideration.

Power cord revenues grew to $155m (excluding contribution from DEKA)
EV cables sales grew 193% to $53m
Medical reduced $3m (easy to attribute to covid restrictions)
Complex industrial sales grew 13% to $113m
Margins have quadrupled over the last 5 years (rising to 9.7% from 8.1% in FY 21)

50% of the cord business is vertically integrated (Volex makes the cable). This is likely to grow with increased capacity in Batam, Indonesia, which should help lift gross margins.

Acquisitions

The acquisition of DEKA was completed in February 2021. This is a business that has grown for 8 straight years and has margins of 14%. It is a supplier of power cables to the white goods market. With DEKA, Volex should be able to produce almost 100% of its cable requirement.

Volex then acquired Irvine Electronics for $16.4m (completed 1st Nov 2021). They have also acquired Prodamex and Terminal & Cable TC Inc. (completed 4th Jan 2022) for $22.5m CAD.

Terminal & Cable TC has 50 years experience as a leading manufacturer of wiring harnesses in the defense sector, whilst Prodamex supplies wiring harnesses for domestic appliances. There is a cross selling opportunity here with DEKA.

Irvine has 30 years experience and relationships within the US defense, military, and aerospace markets providing…

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shanklin100

8th Feb '22

To calculate P/E's you need the share price and EPS denominated in the same currency.

GloucesterBob

Excellent write up, you have covered all the points.

All I will say is every time I buy some, the price drops, you will be pleased to know, I am not buying anymore, but I am not selling any either.

TooBaldTooSoon

Schoolboy error! Thank you for the feedback. The PE then is still below 15, not ideal for my personal preference (I like it to be under 10), but the sector growth prospects are reeling me in.

Surrey Steve

A great write up on Volex (LON:VLX) (I hold having bought above the current level and topped up after the fall).

From the company presentations on Investor Meet Company (worth a look if you haven't already), I understand that the company is able to pass on copper raw material prices under the terms of its supply contracts.

Like you, I am somewhat at a loss to explain the recent share price trend other than a number of small cap growth companies have suffered a similar fate. One suggestion I heard was that it was connected to the Turkish subsidiary and the general issues with that country but I find this difficult to understand as Turkey does not appear to be the end market.

For now I'm happy to sit tight on a 5 year view but happy to hear the thoughts of others.

willhampson

A very well written review of the considerations before buying and particularly impressive given that you say you only started a year ago! I find Volex (LON:VLX) a difficult one. It was completely unloved for years, including in 2019 when it was fairly clear the growth sectors it was making serious moves in yet the market was uninterested and ascribed a modest valuation. This clearly changed and it became a bit of a private investor darling hurtling the price circa five fold at its peak.

It's difficult to pin precisely why it has drifted back so much. One option is it just got far too overheated (a PE for this at over 20 makes v little sense to me, for example) as did many small/mid caps and has been met with selling as investors take profits given the uncertainties over the last six months. Copper prices are a risk, but the company says it is able to pass this on under its contracts (although they say there is a small lag in this taking effect). Turkey is a bit of a basket case, with inflation running over 48%, but I grapple with how much of an impact that will have on DE-KA.

That all being said, I agree Volex (LON:VLX) looks decent value right now assuming forecasts are met. The problem with that is the market - via the share price - is telling you that those forecasts are potentially under threat. I struggle with the argument that it's just drifted down with the rest of the market; the fact that it hasn't rebounded like others have is potentially quite telling. Personally, I would wait for the update in April and accept that you might have to pay a little bit more. Better to pay an extra 10-15% with the certainty than take the risk of a large haircut in two months, in my view. Good luck and all the best with whatever you decide. Will.

Wilbraham

Thought I'd read that the recent Phillips profit warning had a negative impact on Volex (LON:VLX) being a major medical devices customer https://www.reuters.com/busine...

Velo

Hi TBTSoon,

For someone who's only been investing about a year, I too would echo others' comments that your post is an excellent summary of the body politic of Volex. Never mind for only a year, it's an excellent piece no matter the years of investing experience - well done!

It's also indicative of the fact that good fundamentals alone aren't always enough on their own to be sure of success, as I regard sentiment/trends as the final arbitrator of price - no matter the fundamentals. I don't see anything much to fault in the trading profit and loss accounts (Income Acc). However, under almost every stock rank, fundamental metrics applicable to VLX score very mundanely, dour even.

I have VLX on a watchlist but became disenchanted with the SP trend. So looked a little deeper in response to your blog post, and as usual, I start by back-tracking the SP to the source of the change in sentiment - and then used those findings to dig into the prima facie cause of the decline in price.

Before 2016 the SP endured a roller coaster ride; but from 2016 onwards, on long-term views, it's been an admirably bullish ride peaking at the ATH in the 490's, and that was in September of last year. That was as good as it got.

From then, it fell and rose for a month or so, looking like it would recover but something happened just before mid-November that pushed it "off a cliff edge"

- And the price hasn't stopped falling since. What happened in November of last year?

- Only the publication of the half-year report on 11th November! That was the catalyst. What ever was in there, precipitated this non-stop fall.

However, upon reading it, all seemed fine to me. Nice increases over the previous year are everywhere. There is mention of:

" Mindful of the potential for disruptions caused by global component shortages and shipping issues however, at present, continuing to successfully manage these risks ".

And - " ...with revenues and underlying operating profit well ahead of last year, despite multiple market-related challenges such as supply chain disruption,....."

And concludes that there are excellent long-term prospects because, in the face of those supply chain issues headwinds, they have still made commendable increases in the face of all that.

So the inference is - we will continue to deliver as it hasn't hurt us at all.

With container shipping costs set to increase by 400% perhaps the market thought the CEO hadn't fully realised the dangers that are set to impact businesses that need imports.

That and the fact that in achieving those great results, margins had tightened.

Gross dropped to 21.3%

Whilst Operating margin fell a full 1% from 10.3% down to 9.3%

Also, so many share options were handed out to management it's more than likely that Earnings per share will now, not grow in line with cash profits.

So yes, great results, but the market maybe thought that the supply chain threats may hit harder than management is forecasting.

It was definitely the H1 trading report that upset the market.

I googled and found comments from media analysts of, quote:

" But it was the release of the company’s half-year report that caused the stock to tumble." Said one analyst on the 12th November.

- And that fits perfectly with the SP falling dramatically from November onwards last year and still not ceasing today.

The short-term trend is bearish, intermediate, medium up to the 200 predominant trend - all bearish (only the uber long term monthly charts remain bullish).

Personally, I will wait until sentiment is seen to change and maybe buy then. (And price breaks above the 200-day trend).

Good advice from one poster who suggests waiting until the full results are published in April. Generally most Aprils since 2016 have boosted the SP quite noticeably, producing the best gains of the year - because there's been encouraging trading reports released that month.

Longer-term, IMO it looks great for VLX, once Covid/supply chain issues/ price of copper expected in some quarters to rise dramatically etc.,/ are all out of the way and history.

The year-end April results will be published in June. However, there should be a brief quickie update about a week or so after the early April results are in.

In the meantime, one to watch for guess-the-floor in the SP as the bears still rule- for the moment.

gringo

I suspect part of the fall will be covid outbreaks in China. Think they have factories near Hong Kong and Shanghai, both of which have had covid outbreaks. Hong Kong today imposing severe restrictions.

China are obsessed with zero covid, which was feasible with Delta but with Omicron seems completely impossible. This has helped reduce factory output in China to lowest for 2 years. There were some factory closures/reduced hours at the end of last year due to covid/power shortages, I dont know how widespread it is now.

None of this might be applicable to Volex but since the next trading update will likely be April it leaves lots of time for nervous investors to get jittery. Add in commodity price increases, supply chain problems, inflation and a general market nervousness I can understand why its sold off. Luceco (LON:LUCE) is in much the same boat and its sold off too. In fact the CEO just dumped 3m shares.

James Kerr1

It is summed up nicely in your phrase good value 'assuming forecasts are met'. Mr Market seems to be good at working out reasons why they might not be - maybe it's right and maybe not, but dynamic smaller compnies with big raw material requirements and international supply chains have all been hit. Luceco and Headlam are among others that I hold that are in the same boat. This morning's results from Alumasc met expectations and the price was still marked down over 10 percent, albeit to claw a good bit back later. Longer term you have to think that well run companies will outperform.

Logical David

9th Feb '22

An excellent writeup TBTS on Volex (LON:VLX) (I hold). I see the shares are up +6.5% today. I don't know whether the price rise is due to your excellent research and report or whether the shares are just plan too cheap and they are due a bounce back, which is my opinion.

David.

shamusj

I suspect it's neither (although the research was well written). The American growth market has come roaring back today, and the UK simply follows (I hold).

Epsilon

"Volex (LON:VLX) is positioned in three high growth areas:

Complex assemblies for medical devices
High spec copper cables
EV charging cables "

Words like 'complex' & 'high spec' make this company sound as though it maybe possesses a franchise with high entry barriers, yet the gross margin of just 21.7% (TTM) suggest otherwise - gross margins this low suggest the company is taking raw materials and adding only a small amount of value on top. A run-of-the-mill Industrial company.

Additionally, the % growth of shares in issue over the past four years exceeds the % growth in Total Equity (even when ignoring the growth in Intangible assets)- shareholders maybe need to question this company's reason for being.

Glorenfeld

10th Feb '22

Maybe I'm being dense, but on what are you basing : "Additionally, the % growth of shares in issue over the past four years exceeds the % growth in Total Equity (even when ignoring the growth in Intangible assets)- shareholders maybe need to question this company's reason for being."

Using stocko's numbers, I make it that book value has increased 68% in last four years while no. of shares has increased 22%.

16th Feb '22

Thanks all for your comments and feedback, it's all valued and appreciated. I decided to buy some Volex this morning.

Although I can't pin point the SP fall over the past few months myself, my view is that the relevant fundementals are there to make an investment here an acceptable risk, underpinned by the recent 2x £250k director buys. I don't have a view how long I will hold this for at present, but this is all part of the learning curve and hopefully I will be enjoying an upward climb on the SP from here.

I'm trusting my gut feel here, and think that is a good way to go as the last time I did that it was to put a decent volume of my capital into John Menzies (LON:MNZS) ....which is going quite good at the moment......

Good luck. I posted earlier in the thread and have now slightly changed my view based on the CFO's comments a few days ago. Perhaps naively I took the statement that they "continue to perform robustly, successfully navigating the current supply chain challenges while demonstrating our ongoing ability to pass through inflationary cost increases" as a sign that they will be unlikely to profit warn.

I've now bought an entry position, and will still wait till April to determine whether to make it a larger position. All the best. Will

Revs8

I'll reiterate what a great write up on Volex (LON:VLX)

I don't hold this share and haven't any additional knowledge to add but the write up was so good I thought I'd take a look.

Looking at the headline Stockopedia figures and drawing a few lines on share price charts my (obvious) conclusion is that Volex (LON:VLX) has suffered serious over inflation of share price and is now suffering a bust as negative momentum sets in.

The next obvious question is "has it oversold?". I constantly remind myself that just because a share has suffered a selloff it isn't necessarily good value (this is to stop my bargain hunting head overriding logic). Even if a share price does now appear to be good value it doesn't mean that the share price will recover quickly. Investors are very wary of getting burnt twice.

Personally I don't see any great growth or value projections on Stockopedia although I accept headline numbers don't show the whole story.

Drawing a few simple lines on the charts suggests that the share price may have returned to fair value or even below fair value but there is always the danger it will over sell further before recovering. Therefore, like a few other commentators, I would like to see a clear change in trend before dipping my toe in on this one.

Long term - the arguments in the write up are all good so you'd expect the price to be higher in a few years time.

sharw

19th Feb '22

Some interesting comments from Edmond Jackson: https://www.ii.co.uk/analysis-...

maillotàpoisrouges

28th Mar '22

Looking for low PE ratios in this day and age is not a good screener for stocks. Lots of high growth companies are on v high PE ratios. Trawling for low PE ratios will net you a pile of dross, largely companies in declining industries, questionable earnings, or pension deficits.

Steve Watson

29th Mar '22

This is a very good write up, but it is not the work of TooBaldTooSoon. The vast majority of the information here is lifted directly from SCSW who have been following Volex (LON:VLX) since June 2010 and wrote the article where the vast majority of this information has been lifted from in November 21. TBTS other 'gut feel' John Menzies (LON:MNZS) has also been written about extensively in SCSW over the past few months.

I subscribe to both Stocko and SCSW as they offer different things in the small cap market. I would highly recommend SCSW as you get the type of insight here on a monthly basis across a number of companies.

I value the rational insight we as a subscribers bring to these discussion boards as it is far more informed and thought through than free sites, for example the excellent review Paul and Jack do daily via the SCVR but we should not be copy and pasting other publications work and passing it off as our own, without the original authors permission and especially not where the authors livelihood relies on a subscription service for that content.

6th Apr '22

Hi Steve, thanks for the comment. I don't deny that a lot of the fundamental information in my write up has been knowledge gained from other sources, a write up in SCSW prominently being one of them, but of course a lot of the information I look for is facts and figures, and this will no doubt bear similarities to initial sources.

Rest assured, I have spent many hours of many days of many months looking into Volex (LON:VLX) from numerous sources, making my own notes and toiling with the avenues I should be looking at before taking a decision to invest or not, and before creating this post. I don't deny similarities with various statements between this write-up and that of SCSW, but I don't really agree with the claim this is a simple "copy and paste", and it's certainly not an attempt to pass others work of as my own.

I'm more than happy to cite information sources on future write-ups, and perhaps in hindsight this is a good habit to adopt, I too value rational insight and transparency! And yes, John Menzies (LON:MNZS) has been written about in SCSW, that does not detract from the fact it was a gut feel of mine to decide whether it was right for me to invest, as are the other companies I currently hold, none of which have appeared (to my knowledge) in SCSW or other similar publications.

Volex - An electrifying prospect or a short circuit

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TooBaldTooSoon

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