Volex taps investors as momentum builds

Shares in Volex (VLX) surged in April, after the cable manufacturer boosted its full-year revenue and profit forecasts. Today’s results do not disappoint. Revenue is up 18 per cent year on year at $723mn (£566mn), fuelled by organic growth of 11 per cent. Meanwhile, statutory operating profit has jumped by 31 per cent to $53.8mn.

Electric vehicles (EV) are still a key driver of growth. Organic EV sales increased by a third to $138mn, and the group has consolidated its position as market leader for grid cords. Other markets have also proved lucrative, however. Revenue from complex industrial technology increased organically by 19 per cent to $177.7mn, while the medical division – helped by a rollout of new technology and a global backlog in medical procedures – saw organic sales grow by 16 per cent to $145mn. 

The big question mark over Volex relates to its consumer electricals division, which generates about a third of group sales. What happens to demand if economic conditions stop people from buying laptops, printers, televisions and kitchen appliances? 

Things could certainly be worse. Organic revenue only dipped by 3 per cent, and this wasn’t to do with volumes or market share, which both improved. Instead, “significant deflation” in the price of copper and PVC – the principal constituents of power cords – meant Volex couldn’t charge as much as before. 

Despite this, however, Volex’s operating margins are still moving in the right direction, edging up from 9.1 per cent to 9.3 per cent year on year. Meanwhile, cash flow has significantly improved. Free cash flow now sits at a respectable $38mn, up from $4.1mn last year. The situation has been helped by external conditions, as well as strong sales: supply chain problems are easing, meaning Volex hasn’t had to buy as much stock. 

Acquisitions are a core part of Volex’s growth story, and management is now tapping investors in order to buy a Turkish company that makes wire harnesses. The cable manufacturer has agreed to buy the entire issued share capital of Murat Ticaret for €178mn (£153mn), and has announced a placing and retail offer to raise gross proceeds of approximately £60mn. The new shares represent about 13.7 per cent of the existing issued share capital. 

While investors might not be thrilled at having to stump up the cash, the acquisition seems to make sense. Manufacturers are keen to move production out of China, and Volex made another large acquisition in Turkey last year.

We maintain that Volex’s double-digit growth story is hard to resist – particularly given that it only trades on a forward price/earnings ratio of 12. Buy.

Last IC View: Buy, 243p, 4 May 2023