Volex (VLX) is the second largest supplier of power cables and USB leads to the big electronics manufacturers. It should be thriving, but in recent years has been rather accident-prone - alienating its largest customer and discovering a knack for profit warnings. We spotted its recovery potential last year, and new management's "transformation" plan is beginning to deliver results. A fan club is developing in the City, too, and the potential for earnings upgrades is becoming clear.
- Transformation programme under way
- Business stabilised in third quarter
- Earnings upgrades likely
- Heavily oversubscribed placing
- Previously accident prone
- No dividend
Much depends on the new board. It certainly has pedigree. After a successful career in automotive and industrial supplies, Christoph Eisenhardt took over last summer, six months after Volex's final profit warning. Nick Parker, who once ran Sheffield Wednesday Football Club, joined him from WANdisco soon after. They've been busy repairing relationships with customers and winning new business, and early signs are promising.
Most important is Apple. It's easily Volex's biggest customer, generating up to a quarter of sales, but hinting at suicidal price increases lost previous management a huge chunk of business - reflected in forecast earnings falls this year. Apple buys iPhones and iPad cable from three suppliers, and margins are typically mid-single digits. We understand that everyone is friends again, and that Volex has actually "maxed out" its allocation of business from Apple.
New products will likely drive demand, too. There's a lot of talk about an Apple television, or iTV, launch this year. Volex will also make leads for other new gizmos, and while Apple's move to more environmentally-friendly Halogen-free leads has cost Volex millions in development work, it should soon prove worth it. Asian rivals like Samsung will likely Apple's lead, pushing business Volex's way.
VOLEX (VLX) | ||||
|---|---|---|---|---|
| ORD PRICE: | 106p | MARKET VALUE: | £70m | |
| TOUCH: | 105-109p | 12-MONTH HIGH: | 132p | LOW: 82p |
| FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | 15 | |
| NET ASSET VALUE: | 54¢ | NET DEBT: | 116% | |
| Year to 31 Mar | Turnover ($m) | Pre-tax profit ($m)* | Earnings per share (¢)* | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 490 | 22.9 | 32.4 | 2 |
| 2012 | 518 | 28.2 | 42.5 | 4.5 |
| 2013 | 473 | 10.1 | 11.2 | 5 |
| 2014* | 393 | 3.1 | 3.6 | nil |
| 2015* | 403 | 11.2 | 11.9 | nil |
| % change | +2 | +261 | +231 | - |
Normal market size:2,000 Matched bargain trading Beta: 0.2 *Investec Securities estimates, adjusted PBT and EPS figures £1=$1.66 | ||||
Trading stabilised during the last three months of 2013, and tightening up its processes and shifting to a multi-sourcing supplier model will slash spend on raw materials - about two-thirds of all costs - and narrow the significant margin gap to rivals. We expect confirmation in a trading update next month.
Despite ugly numbers, November's half-year results piqued City interest and a surprise, and heavily oversubscribed, placing and share sale just before Christmas at 116p, a small premium to the market price raised £7m, with significant demand left unsatisfied. Not to be left out, new non-executive director Daren Morris has just bought 30,000 at 112p.
For now, analysts are being deliberately conservative. "Initial signs of progress are encouraging," admits Investec Securities, but believes it is "still too early for this to be reflected in our forecasts". Maybe, but keep this up and the first earnings upgrades may not be far off. Already, Investec forecasts EPS to more than treble in the 12 months to March 2015, then rocket two-thirds the year after to 19.6¢.
