Company comment: Cost cutting helps Volex
Nov 03, 2009
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Cost cutting and selling an increasing amount of higher margin products has enabled Volex to improve profitability at a time when revenues are declining. There is only so much that the electrical and electronic assemblies supplier can do for itself and it needs businesses to start investing more before its revenues will make a significant recovery.
Volex says that it will take a sustained improvement in business spending before its markets turn up. Power cords for electrical products and telecoms assemblies are the main markets for the company. Lack of exposure to automotive has been a plus.
Once businesses start to regain confidence they will start buying equipment again. When that will happen is another thing.
Reported revenues from the power products and interconnect divisions both declined by around 17-18%. The global cable assemblies market declined by nearly one-third over the past year. Volex is doing better than many of its main peers, most of which are losing money.
The geographical split of turnover tells a story in itself. European sales were 46% lower in the period. Telecoms-related sales were poor. At least some of this business appears to be moving to Asia, where the decline was a much more modest 2%.
Interim revenues slumped from £133.9m to £110.2m, while operating profits, before restructuring charges, moved ahead from £4.13m to £6.13m. A reduction in the copper price helped to improve margins. Reported pre-tax profits fell from £2.79m to £1.7m - but the latest figure is £4.36m if the restructuring costs are added back.
Interestingly, Volex has not made as high an interim profit from the interconnect division since the first half of 2006-07. There are also signs that the power products division may be picking up because revenues were 17% higher in the second quarter compared with the first quarter.
House broker RBS is positive about the full year even though the interim profits came in below its expectations. The broker has even upgraded its full year underlying pre-tax profit forecast by 8% to £9m. The share price has nearly doubled over the past six months. At 80.5p a share, the shares are trading on less than nine times prospective 2009-10 earnings.
RBS believes that net debt could be down to £9.1m by the end of March 2010. That is well within the company's bank facilities.
Staying profitable and generating cash at such a tough time is impressive. Volex reckons that it will be able to rapidly increase capacity at minimal additional cost so it is well placed for any upturn.
A lack of share liquidity meant that Volex was dropped from the FTSE All Share index. Liquidity has improved in recent months and Volex believes that it could return to the index in the June 2010 quarterly changes. That could have a positive effect on the share price if it happens.
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