Volex spends more to escape supply chain tangles

Volex has managed to negotiate a path through the supply chain tangles that have ensnared many manufacturers but has had to spend more to do it.

The amount of cash the cable maker generated from operations fell by 52 per cent to $18.5mn (£15.1mn) as it more than doubled inventory spend to $28.1mn “to meet customer requirements in the face of extended lead times and supply chain shortages”, it said.

It also spent $54.9mn on four acquisitions, buying up competitors in the US, Mexico and India. These deals help it pitch to some of its larger, global customers who look for suppliers that “can provide solutions closer to their end markets”.

These investments mean net debt increased to $95.3mn, a $68mn year-on-year increase. This doesn’t yet look like too heavy a burden given a 34 per cent rise in operating profit to $41mn. The net debt-to-earnings ratio used by its lenders increased to 1.3 times adjusted cash profit, from 0.3 times last year.

Volex has trebled its borrowing capacity to $300mn and plans to use this to fund more deals. Executive chairman Nat Rothschild highlighted an “exciting acquisition pipeline” as the company set new, five-year targets of near-doubling revenue to $1.2bn by 2027 while maintaining an operating margin of 9-10 per cent.

Most of its end markets are performing well – organic revenue in its electric vehicle charging business almost doubled to $104mn and its consumer electricals arm reported a 60 per cent sales increase to $262mn. Its medical business, providing components such as printed circuit boards to pieces of medical kit, also experienced double-digit growth. But its complex industrial technology unit saw growth slow as the supply of cables to data centres weakened given that a new cycle of higher-capacity products is beginning.

Building businesses through acquisitions is a well-worn strategy but execution is tricky, particularly when you’re integrating a group of them at the same time as handling supply chain strains and a rising cost of capital.

However, Volex's shares have more than halved from their peak of 495p last September and now trade at a valuation of under 11 times consensus forecast earnings of 29p a share. Although the increase in the price of copper used in its cables has been a concern, it has passed this through to customers and the company looks cheap given the prospects for profitable growth. Buy.

Last IC View: Buy, 398p, 11 Nov 21