7:59 cut – VLX

Volex (VLX) – FY 2019 Results

Volex has been transforming itself over the last 18 months from a manufacturer of commodity cables with operating margins below 3% (and often negative) to a more specialist supplier of things like electric car charging cables and specialist cable assemblies, the later assisted by a number of acquisitions. They were also well known a few years ago for having a large amount of (albeit somewhat specialist) business with Apple before the inevitable happened.

Will this transformation be reflected in today’s results?

Revenue is probably the least important thing here, but nonetheless is slightly ahead of expectations, up 15.4% following acquisitions, or 9% like-for-like.

Underlying EPS is showing at 12.7c vs 13c shown on Stockopedia, which would be inline, but Stockopedia shows 55c for last year versus the claimed 8.9c comparable, so (as is often the case) it is very difficult to know which figures are comparable – or perhaps this is another data error? The single broker is N+1 Singer. Taking Volex’s figures, EPS is up 42.7% and reported (basic, unadjusted) figures certainly seem to be ahead of anything in recent years.

Cash was $20.6m, 23% of yesterday’s market capitalisation, following a significant fund raise balanced by acquisitions.

Adjusted operating profit and margin

Perhaps the most important figure (not given in the headline figures) is operating margin which has now increased to 3.5% on a reported basis. They quote underlying profit figures excluding one-offs, but these also exclude share-based payments and so while they may be useful to year to year comparisons, they are certainly not appropriate for calculating operating margin. Here is my underlying profit calculation:

Severance costs in China due to the reduction in legacy business: $1.5m – similar costs occurred last year and more are likely in future, either as part of the same trend or unexpected business changes. I’ll allow $0.7m.

Closure of Indian factory as part of rationalisation: $0.5m + $0.3m. If you accept this is now full closed then this is a true exceptional cost.

Legal charges and staff retention costs for acquisitions: $1.8m The former is certainly exceptional. The later may have an ongoing element. I’ll allow $1.5m. The amortisation expense can be useful to exclude in year-on-year figures but will be ongoing and so not for other purposes.

The GMP pension changes are one-off: $0.2m net.

The share based payments charge is up from $1.1m to $2.2m. Some of the difference is exceptional. I’ll allow $0.9m.

My adjusted operating profit is then 13 + 0.7 + 0.5 + 0.3 + 1.5 + 0.2 + 0.9 = $17.1m, giving an operating margin of 17.1 / 372.1 = 4.6%. This is approaching the level that I consider long-term investable.

Outlook

The outlook statement is positive – I particularly like:

“there remain substantial identifiable opportunities for both divisions to improve sales and margin performance through disciplined execution of our strategy, in both the short and longer term, and we expect to deliver further value to our shareholders in the year ahead.”

Second paragraph of outlook statement

If they do nothing in the current period then revenue, operating profit and margins should continue to grow significantly purely from the effect of a full year’s contribution from recent higher-margin acquisitions, the ongoing tail-off from lower margin legacy business, and (on a reported basis) the non-repetition of exceptional costs.

Conclusion

I am confident the transformation towards a company I would like to have in my long-term portfolio in is well on track. With a forward PE of 8.4 [Edit: 8.8 at yesterday’s close] (Stockopedia) I think it is well worth getting involved before the process completes. I have a starter position that I intend to add to this morning or soon afterwards.

Congratulations to anyone who bought in 2016 or 2017!