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Investment Manager Nick Hawthorn discusses portfolio holding Volex
Volex makes power cords and cable assemblies for use in electronics and electrical devices. The business goes back 120 years and this perhaps accounts for some of its past problems: it operated in commodity-type markets at a time when low-cost competition from automated Chinese rivals put profit margins under pressure.
Management and strategic changes were tried but all “failed to capitalise on the firm’s competitive strengths”, said Nick Hawthorn of Downing, whose firm holds Volex in its IHT portfolio. “Investors lost heart and its market value fell significantly,” he added. New managers are now in place.
“Where previous teams invested in chasing low-quality revenue and earnings growth, the new one focuses on operational and supply chain excellence and profitable growth,” Hawthorn said. Volex now plays to its strengths in areas such as cable assemblies for use in data centres and healthcare, where the work is labour intensive and quality is critical.
“It is focusing on the opportunities against which Chinese automation can compete least effectively,” the fund manager added."
He also pointed to the alignment of interests between the new managers and investors: the former own more than 25pc of the equity – shares they have paid for, not acquired via options.
Hawthorn said Volex had market-leading attributes in global sourcing and production, significant investment in capital assets, a skilled and global workforce, blue-chip customers and a long-standing reputation for quality. “We believe these qualities create an economic ‘moat’ and a position of strength in the highly fragmented industry in which it operates,” he said.
The shares trade at about 10 times forecast earnings – low for a stock whose organic growth is expected to be about 10pc a year.
“We think Volex has now turned a corner, posting its first statutory profit since 2012,” Hawthorn said. “The turnaround has been well executed and there are great opportunities to profitably grow the business. This has yet to be reflected in the share price. We think Volex is one of the most attractive opportunities at the smaller end of the Aim market.”
Any personal opinions expressed are the views of the Fund Manager at the time of publication and are subject to change and should not be interpreted as advice or a recommendation.