Volex hit by EV destocking

Shares in cable manufacturer Volex (VLX) wobbled after it reported lower demand for electric vehicle (EV) components. Organic EV sales – previously a key driver of growth – decreased by 16 per cent in the six months to October as a result of “short-term customer destocking”. 

The consumer electrical division also saw organic sales fall by 9 per cent due to “normalisation of demand” post-Covid and lower copper and PVC costs, which forced Volex to reduce the price of its products. 

However, these declines were more than offset by strong performances from the company’s medical and industrial technology businesses, and total organic growth came in at 4.2 per cent. Meanwhile, adjusted profit before tax jumped 16 per cent to $33.6mn (£26.7mn), with the help of wider margins and recent acquisitions. 

It is unclear when demand for consumer electricals and EV cables will pick up again. Management said clients in the US and Asia are still working through their inventories, as they began the destocking process later than European businesses. Simple power cords for EVs also have short lead times of about three months, meaning visibility is poor. 

Ultimately, however, today’s results showcase the success of Volex’s diversification strategy. The group is still achieving sales, margin and profit growth despite trouble in key markets and is on track to hit its full-year forecasts. The industrials technology division, which supplies cables for data centres, is looking particularly promising. 

Demand could continue to fluctuate in the short term as customers work through order backlogs caused by previous supply chain issues. However, Volex’s core proposition remains strong and its forward price to earnings ratio of 10.3 is far from demanding. Buy

Last IC View: Buy, 280p, 22 Jun 2023