I had intended to post my thoughts on Volex over the weekend, but domestic commitments prevented me doing so.
Volex is a sizeable holding for me having first bought at around 100p, so I will undoubtedly has a tendency towards bias, that I shall do my best to avoid.
Cutting to the chase, the shares have fallen around 13% this year, trading at 315p at the beginning of January to around 273p today. This suggests that the market is of the view that earnings of around 25p (converted from dollars) may no be achieved.
Volex operates in five diversified end markets:
- Consumer electricals 26% of revenue
- Electric vehicles 13% of revenue
- Complex industrials (data centres etc) 20% of revenue
- Off Highway 24% of revenue
- Medical 17% of revenue
There has been a softening in demand, due to destocking in the higher volume consumer electricals and EVs. At the interim announcement in November, the company stated that destocking in consumer electricals by its European customers had largely ceased and demand was starting to improve, although destocking was continuing in America and Asia. Volex remains one of the most efficient and cost effective manufacturer of consumer electricals. The company is vertically integrated which facilitates competitive pricing.
In medical and complex industrials the company's customers have been able to increase production due better availability of key components, resulting in these end markets experiencing strong demand. In medical, Volex mainly works as a contract manufacturer with the result that production tends to be supported by corresponding orders.
Business continues to be strong in complex industrials with increased demand for the company's high speed 800Gbps cables by data centres, driven by the growth of cloud computing and AI.
Regarding the off Highway sector, the integration of Murat Ticaret is proceeding well with according to the company a multi-disciplinary team engaged in the delivery of integration plans. Murat Ticaret enjoys higher margins than the other sectors in which Volex operates and I anticipate that once fully integrated operating margins will be much closer to 10% that the 9.4% reported at the interims. The aim is to internationalise Murat Ticaret sales
The company does not provide operating margins for the individual areas of operation, but complex industrials, medical and off highway have the highest margins. These activities are lower volume and specialist manufacturing. On this basis it is reasonable to conclude that the higher margin specialist manufacturing capabilities…
