Cable manufacturers often operate in the background, providing essential wiring for a range of products including laptops, appliances, automobiles, and medical devices. While their impact is significant, their performance frequently goes unnoticed. Volex, a company listed on AIM, has recently been feeling the effects of this obscurity, presenting what might be an intriguing purchasing opportunity for investors.

Founded in Manchester in 1892, Volex operates in 25 countries and employs approximately 14,000 individuals, generating sales that make it sensible to account for revenues in US dollars. Managing such a geographically diverse organization is inherently complex, particularly for the leadership team based in Basingstoke, but the company is actively pursuing an expansion strategy primarily through acquisitions.

Investors’ fortunes are closely tied to the leadership of Nat Rothschild, who serves as executive chairman and holds a 25% stake in the company. Rothschild is focused on identifying potential acquisition targets, ideally at prices below Volex’s price-earnings ratio to maintain value for shareholders. His current mission involves seeking out family-owned enterprises globally, excluding China, with recent interest in Canada, Mexico, India, and Turkey.

“We will continue to allocate capital generated from free cash flow toward impactful acquisitions,” Rothschild stated, emphasizing the ongoing potential within the acquisition pipeline. Shareholders are justified in expecting a strategy consistent with the longstanding reputation for savvy business management associated with his family.

Volex operates through five distinct divisions based on end markets: electric vehicles, consumer electricals, medical technology, complex industrial solutions, and off-highway vehicles. In the previous financial year, consumer electricals emerged as the leading revenue source with $235 million, followed closely by complex industrial at $213 million. Medical revenues reached $178 million, while electric vehicles contributed $124 million.

The newest division, off-highway, generated an initial $163 million primarily through the acquisition of Murat Ticaret in Turkey. This segment caters to specialized vehicles used in agriculture, construction, and earth-moving, which typically do not operate on public roads, necessitating highly specialized wire harnesses and battery cables that offer the potential for improved profit margins. However, there have been reports of dissatisfaction among employees at Murat.

Despite challenges in electric vehicle sales due to inventory clearances, Volex anticipates significant growth in this area over the next five years, projecting a compound annual growth rate of 10%. Demand for high-speed cable in data centers should see complex industrial growth closely trailing electric vehicles. Medical technologies, expected to grow at around 6% annually, are well-positioned to benefit from the rising need for sophisticated care among aging populations, while trends in smart technology and energy efficiency are expected to boost consumer electrical sales.

With the upcoming half-year results set for November 15, a recent update suggested that financial performance is aligned with expectations. Organic revenue growth was noted at 9.7%, led primarily by electric vehicles. Consumer electricals, alongside complex industrial and off-highway sectors, are rebounding after a flat period. Medical technology, however, has experienced a slump due to comparisons with a post-COVID recovery phase. Operating profit margins are estimated between 9-10% on total revenues surpassing $510 million.

Rothschild remarked that the group is “well positioned to sustain the current momentum during the second half of the year.” If this momentum mirrors last year’s performance, a revenue figure of $1.13 billion and an operating profit of $113 million can be anticipated, marking an increase from $89.7 million for the year ending last March. This projection is without factoring in acquisition contributions and could lead to earnings per share of 40p and a prospective price-to-earnings ratio of 8.1. Dividends are likely to remain minimal at approximately 1.8%, with the focus on further investments both organically and through acquisitions.

Considering that cable products are often indicators of economic activity, the global outlook appears favorable for growth. This sets the stage for consistent progress in both sales and profits moving forward. Having been recommended in this column two years ago at 236p, Volex shares have recently seen a rise to 328p. This upward trend may indicate a promising future as the demand for cable products continues to grow in tandem with advancements in artificial intelligence.

Hornby

Hornby is widely recognized for its toy brands, including Scalextric, Airfix, Corgi, Triang, and its iconic model railways, originally launched by Frank Hornby, the inventor of Meccano, over a century ago.

On the stock market, however, it’s key shareholders such as Phoenix Asset Management Partners, Artemis Asset Management, and Frasers Group that capture attention, holding stakes of 71.6%, 9.7%, and 9.2%, respectively. This substantial collective ownership means individual investment interest is limited, yet shares have seen a decline from 38p to as low as 18p earlier this month, down from 69p in January 2021.

Frasers Group’s involvement, led by prolific deal-maker Mike Ashley, is particularly noteworthy as he actively pursues growth opportunities, as evidenced by recent acquisitions in other sectors.

In March, Hornby announced that Ashley would provide consultancy services focused on operational systems, logistics, and broader strategic concerns.

Despite a reported revenue increase to £56.2 million for the year ending March 31, higher operational costs led to a greater pre-tax loss of £8.7 million, up from £5.9 million the previous year. Increased costs were attributed to investments and price stabilization efforts.

While CEO Olly Raeburn acknowledged these results were below expectations, he characterized the company’s situation as a turnaround phase. However, clarity on a new strategic direction remains vague, as the company assesses cost-cutting measures and non-profitable segments.

Given the significant stakes of its primary investors, some form of strategic action may be expected in the near future, with potential insights likely to emerge following the upcoming interim results.

Advice BuyWhy A speculative play, but the prospects are promising.