Volex: Progress Towards Transformational Plan

 Volex has announced half-year results that are in line with our expectations. We are particularly encouraged by the strong revenue growth in both divisions (Power and Data) and across all regions and improved margins and the overall progress that it is making towards achieving its Transformation Plan, which was laid out this time last year. We have taken this opportunity to update our forecasts and maintain our stance of buy, with a target price of 242p. 

Half-Year Results

For the 6-months ended 5th October 2014, revenue increased by 12.4% to $220.9m (H1 FY14: $196.5m), primarily driven by increased allocations with existing customers as well as several new customer wins. At 17.2%, overall underlying gross margin was, more-or-less, unchanged on the comparable period a year earlier. Overall underlying operating costs increased marginally by 7.4% to $34.51m (H1 FY14: $32.13m), reflecting increased costs from both the Power division (2.8%) and Data division (1.6%) and central costs (23%). Nevertheless, overall underlying profit increased by 125% to $3.51m (H1 FY14: $1.56m) and margins improved by 80bp to 1.59% (H1 FY14: 0.79%). Following the raising of $27.9m (net of costs) in a placing, net assets increased to $57.4 (FY14: $20.7m) and net debt reduced to $5.6m (FY14: $32.2m). Excluding non-recurring items, Volex saw a cash inflow from its operating activities of $3.8m, which compares to an outflow of $12.0m on the comparable period a year earlier. Reflecting the tighter controls surrounding capital expenditure programmes, capex decreased by 46% to $2.1m (H1 FY14: $4.0m). The group said it was on track to be cash flow neutral for the full-year.

Financial forecasts

With H1 revenue growing at a much faster rate than the industry growth for the power and data markets, which on average is 5%, we are now anticipating revenue of $430m for FY15, growing to $450m for FY16. Being conservative, we are assuming that gross margins remain unchanged and are therefore forecasting gross profits of $74.39m for FY15, growing to $77.85m for FY16. We are pencilling an adjusted operating profit of $8.39m for FY15, rising to $9.85m in FY16.

Attractive valuation

Blending the industry and acquisition EV/EBITDA and EV/Sales multiplies, and multiplying this by our FY16 forecasts, before subtracting out its current net debt position, we have derived our target price of 242p. We see the biggest risks to our forecasts coming from a delay in the execution of the transformation plan, particularly in the manufacturing processes.