Volex makes power cables for everything from kitchen appliances to electric cars for the likes of Tesla. In the past, the business has been hamstrung by the low-margin nature of its work and the precariousness of its contracts. The loss of a deal with Apple in 2012, for example, proved particularly painful. Over the past seven years, however, with the help of a new leadership team, the group has reinvented itself, embraced a wider product range and reduced the concentration of its customers. In 2014, half of revenues came from three clients. By 2020, this had fallen to a quarter. 

This transformation can be tracked via its operating margins, which climbed from 4.4 per cent to 6.7 per cent over the past two years. This is particularly impressive given the direction of freight and input costs – notably copper – and underlines the strength of Volex’s pricing power and customer service. 

 

 

Momentum is building. In a recent trading update, Volex said sales for the year to 2 April would be at least $710mn, representing annual growth of 15.5 per cent. Meanwhile, underlying operating profit is expected to rise to at least $66mn, up 17.4 per cent in a year and more than double pre-Covid levels. 

Acquisitions have played a part: the group has bought 11 businesses since 2018, with a particularly hefty purchase in 2020 (more on which later). However, the core business is also performing well, with organic revenue growth hitting 14.3 per cent between April and October 2022. 

The company’s electric vehicle arm, where organic sales grew 53 per cent over the same period, is the standout performer. The division is inherently lower-margin, causing analysts to suspect that Volex’s adjusted operating margins will plateau at between 9 and 10 per cent. However, exposure to such a dynamic end market should be enough to fuel profit growth. Analysts at HSBC have also noted “good recovery prospects” in medical and industrial tech.

Volex’s exposure to consumer electricals, on the other hand, is a worry, given the cost of living crunch. However, management is confident that increases in market share should “broadly offset any demand changes due to a softening in consumer appetite”. The situation has been helped by the purchase of DE-KA in November 2020 for €61mn (£54mn), the group’s largest acquisition to date. 

DE-KA makes power cords for appliances such as washing machines, dishwashers and fridges and, following a recent site visit, analysts were bubbling with enthusiasm. In a recent note, for example, Canaccord Genuity analyst James Wood said the deal added “immediate scale in white goods with a market-leading share across a blue-chip customer base” with “significant cross-sell opportunities”.

The acquisition is notable for another reason, too: DE-KA is based in Turkey, not in China. “We are seeing competitors who are… scrabbling to get out of China and to find production outside of China,” Rothschild told analysts in November. “We already have a very, very balanced footprint and that has helped us. And we don’t have any plans to invest in our footprint in China. We only have plans to invest outside.” 

Volex hasn’t avoided China completely: it has three facilities there, and the region generates about 6 per cent of revenue. However, it has clearly been diversifying via acquisitions in the UK, Canada, Mexico, the US and India. And while the group’s hand was initially forced by US import tariffs, the move is likely to prove a blessing in the long term as geopolitical tensions mount and more companies seek to nearshore their supply chains to non-Chinese manufacturers. 

Stifel analyst Annabel Hewson added that Volex had a canny approach to acquisitions. “They don’t tend to get caught up in big auctions for companies. They look for ones a bit below the radar – normally family sellers.”

 

Debt dilemma 

Expansion has been a double-edged sword, mind. Volex’s net debt almost tripled in the first half of the 2023 financial year, equal to 1.4 times Ebitda (earnings before interest, tax, depreciation and amortisation). This ratio excludes the impact of operating lease liabilities, however, which came to a hefty $18.2mn, taking the total leverage ratio to roughly 1.7. As a result of its borrowing, the group’s interest payments also jumped by $1.5mn in the period to $2.4mn.

Interest is not the only thing strangling Volex’s cash generation. In the first half of 2023, the group reported a working capital outflow of $21.2mn, which was partly blamed on the extra inventory needed to combat supply chain problems and followed a $34.4mn outflow in 2022.

To top it off, the group has started to significantly ramp up its capital expenditure (capex), splashing out $15mn in 2022, compared with $7.8mn in the previous year. As of 2022, capex represented 2.4 per cent of total sales, compared with 1.28 per cent before the pandemic. 

This capex trend is unlikely to reverse, with management keen to stress that the money is being used to fuel growth, as opposed to treading water. However, there have been some encouraging signs around debt and working capital. In last month’s trading update, Volex said operating free cash flow in the second half of the year was “substantially higher than the first half”, suggesting that the inventory backlog has started to unwind. 

Reassuringly, the company added that net debt has fallen by $22mn since the half-year mark, implying net debt (excluding operating lease liabilities) is now equal to cash profits.

 

Peer comparisons

Plenty of UK manufacturers are fretting about inventory levels, debt and demand. Volex’s recent recovery – together with its relatively small size – make it more vulnerable, and rivals could start to circle. However, these risks seem to be more than reflected in its valuation. 

There is a clear discrepancy, for example, between the way large manufacturers are valued compared with small ones. A company such as Halma (HLMA), for example, has a market cap of £8.6bn, an impeccable track record and a forward price/earnings (PE) ratio of 27. By contrast, Volex trades on a forward multiple of just 10, even after the boost from its recent trading update.

Even among smaller electrical equipment manufacturers, however, Volex looks fairly good value, as can be seen in the chart below, which arranges companies in descending order of market cap. 

Volex recently set out a five-year plan to almost double revenue to $1.2bn by the 2027 financial year, and retain Ebit (earnings before interest and tax) margins of between 9 and 10 per cent. Four years feels like a very long way off, and the past few years have taught us to take nothing for granted. However, after a long and exhausting slog, the comeback kid is certainly making an impressive return so far. 

Company Details	Name	Mkt Cap	Price	52-Wk Hi/Lo
	Volex (VLX)	£387m	243p	325p / 198p
Size/Debt	NAV per share*	Net Cash / Debt(-)*	Net Debt / Ebitda	Op Cash/ Ebitda
	100p	-£105mn	1.6 x	34%

Valuation	Fwd PE (+12mths)	Fwd DY (+12mths)	FCF yld (+12mths)	P/Sales
	10	1.5%	7.8%	1.0
Quality/ Growth	EBIT Margin	ROCE	5yr Sales CAGR	5yr EPS CAGR
	7.0%	14.3%	12.9%	–
Forecasts/ Momentum	Fwd EPS grth NTM	Fwd EPS grth STM	3-mth Mom	3-mth Fwd EPS change%
	6%	8%	-5.6%	8.2%

Year End 31 Mar	Sales ($mn)	Profit before tax ($mn)	EPS (c)	DPS (p)
2020	391	30.2	17.3	3.02
2021	443	42	30.0	2.78
2022	615	51	25.2	3.02
f’cst 2023	707	59	27.5	3.48
f’cst 2024	763	63	29.1	3.72
chg (%)	+8	+7	+6	+7
Source: FactSet, adjusted PTP and EPS figures converted to £
NTM = Next 12 months
STM = Second 12 months (ie, one year from now)
*Converted to £, includes intangible assets of £99mn, or 62p a share