Is it worth buying shares in Volex? Today’s options explained

Cable makers, by their nature, operate below the radar. They supply the vital wiring for many goods we rely on, from laptops, washing machines and cars to medical and computer equipment. But their successes or failures are often hidden from public gaze. Despite undergoing a quiet revolution, shares in Volex, the Aim-listed company, have for some time been suffering from that lack of visibility. But that could present a buying opportunity.
From its Manchester origins dating back to 1892, the company has operations in 25 countries employing 14,000 people altogether, generating sufficient international sales to make it worth accounting in US dollars. That geographic spread in itself is an increasingly complex challenge for the top management, now based in Basingstoke, but its appetite seems far from sated as it is busily implementing a strategy of expansion by acquisition.
This makes shareholders largely dependent on the leadership of Nat Rothschild, executive chairman and 25 per cent stakeholder, to identify suitable targets and buy them at less than Volex’s price-earning ratio to avoid dilution. He is hunting for family-owned businesses almost anywhere but China, recently adding in Canada, Mexico, India and Turkey.
“We will continue to redeploy capital, as we generate free cashflow, into high-impact cash-generative acquisitions,” Rothschild has said. “Our acquisition pipeline remains promising.” Other shareholders are entitled to expect him to be held to the standard set by his family’s long reputation for shrewdness.
Volex has five divisions, defined in terms of end markets: electric vehicles, consumer electricals, medical, complex industrial technology and off-highway. The biggest seller in the last financial year was consumer electricals at $235 million, followed by complex industrial on $213 million. Medical clocked up $178 million and electric vehicles $124 million.
The newcomer, off-highway, made an initial $163 million contribution. Starting with last year’s takeover of Murat Ticaret in Turkey, this covers mainly agricultural, construction and earth-moving vehicles that do not normally travel on public roads. Such vehicles need highly specialised wire harnesses and battery cables to protect the drivers, and that should command higher profit margins. However, there has apparently been unrest among the Murat workforce.
Electric vehicle sales were depressed by customers clearing stock but Volex expects it to be the star performer over the next five years with 10 per cent compound annual growth. Complex industrial should not be far behind as demand for high-speed cable at data centres mushrooms. Medical, expanding at about 6 per cent a year, will ride the demographic trend to older populations in need of increasingly sophisticated care. Smart technology and energy efficiency will drive consumer sales.
While the next half-year results are due on November 15, a recent trading update has indicated that the financial performance in the period was in line with expectations. At constant currencies, organic revenue rose 9.7 per cent, led by electric vehicles. Consumer electricals began to grow again after a flat period, along with complex industrials and off-highway. The apparent laggard was medical, suffering from a comparison with a period of post-Covid catch-up. Operating profit margins were estimated at 9-10 per cent on total revenues exceeding $510 million.
Rothschild added that the group was “well positioned to continue the current momentum through the second half of the year”. If the momentum permits a repeat of last year’s 45-55 split between the first and second halves, that suggests $1.13 billion annual revenue and $113 million operating profit, up from $89.7 million for the year to last March. This is without contributions from acquisitions and could translate into earnings per share of 40p and a prospective 8.1 price-to-earnings ratio. Dividends are likely to be a negligible 1.8 per cent or so while the priority remains investment, both organic and by acquisition.
Products as fundamental as cable are often a proxy for economic activity, and the global outlook seems inclined towards growth. That should underpin steady progress in sales and profits over the next few years. Recommended in this column two years ago at 236p, Volex shares have laboured to 328p. That should give them a platform from which to move ahead more forcefully as cable becomes the joined-up writing for the all-pervasive artificial intelligence.Advice Buy Why The Volex growth story has far from run its course
In the wider world, Hornby is best known for the toy brands Scalextric, Airfix, Corgi, Triang and, of course, the model railways that Frank Hornby, inventor of Meccano, launched over 100 years ago.
But on the stock market the names associated with the company that quicken pulse rates are Phoenix Asset Management Partners, Artemis Asset Management and, most recently, Frasers Group. These are the three biggest shareholders with, respectively, 71.6 per cent, 9.7 per cent and 9.2 per cent. As that adds up to over 90 per cent, there is not much room for anyone else to get a look-in, but that hasn’t stopped the shares halving from 38p to 18p at one stage this month. They were 69p in January 2021.
As so often, the arrival of Frasers is the one most laden with potential. Its guiding light, Mike Ashley, is a compulsive deal-maker, as he has shown lately with the handbag maker Mulberry, the clothing and footwear retailer N Brown and his assault on the retailer Boohoo. He is not in Hornby to play with train sets.
Last March Hornby announced that Ashley had agreed to provide consultancy services covering systems, operations, logistics and “where relevant, broader matters of strategy”.
On the face of it, there does not seem to be much to go for. Sales for the year to March 31 were £1.1 million ahead at £56.2 million, but costs rose by a total of £6 million to £62 million, increasing the reported pre-tax loss from £5.9 million to £8.7 million. The higher costs were attributed to investing and pegging prices.
While the chief executive, Olly Raeburn, admitted these results were disappointing, he characterised the business as going through a turnaround. But, beyond cutting costs and selling lossmakers, there is as yet little sign of what a new strategy will look like.
However, those three big shareholders are unlikely to sit idle forever, so a deal of some sort may be on the cards. We may learn more after the interims in a few weeks.
Advice BuyWhy A gamble, but the odds look favourable