EVs drive growth at Volex

Concerns about growth, margins and debt have weighed on Volex’s (VLX) share price this year; the manufacturer has lost a fifth of its value since the start of January. 

Its latest results should make investors feel more relaxed. Organic revenue growth reached 14.3 per cent in the first half of 2022, fuelled by another excellent performance from the electric vehicle division, which reported organic growth of 53 per cent to $69mn (£60mn).

EVs are not the only draw, however. Volex also manufactures power products and cables for medical devices and complex industrial technology, where demand remains strong. The group's diverse client base makes its exposure to consumer electricals – where conditions look shakier – less worrying. Its global footprint should come in handy as more businesses seek to localise procurement.

Profitability remains the big concern for manufacturers given the state of inflation. However, Volex’s underlying operating margin has remained robust at 9 per cent. This is slightly lower than last year’s 9.3 per cent, but nevertheless suggests that cost inflation is under control. Analysts at HSBC said margins are unlikely to materially expand going forwards, but that revenue growth should be a key driver for the shares.

Not all investor concerns have been allayed, however. Volex’s net debt has almost tripled year-on-year to $117mn and free cash flow has withered to just $100,000 from $3mn a year ago. Cash flow was hit by a $12.5mn increase in inventories to tackle supply chain problems, and a sizable jump in trade receivables, which is worth keeping an eye on.

However, analysts at Stifel said the elevated levels of working capital should be temporary. Meanwhile, Volex’s end markets remain attractive and its forward price-to-earnings multiple of 11 looks reasonable. Buy.

Last IC View: Buy, 245p, 23 Jun 2022