Volex (LON:VLX) are an electrical cables manufacturer. At the start of the year they were pleased to be a supplier to Apple: '..Significant progress in developing our relationship with our biggest customer, resulting in increased allocations. ..we have made further substantial and largely unbudgeted investments in both capital and operating expenditure in Q1 FY2013. ..1,000 net new production staff during the quarter, more than a 15% increase.'
An Edison note in July said management are unusually ambitious to grow firm quickly, by aquisition, if not organic, since firm has stabilised [from 2009] and was now debt-free and generating cash.
The bad news came in September:
'In light of a recent unexpected change in forecast demand from [apple] and the [recession] ..anticipates that revenue and profit ..will fall short.. ..loss of operational leverage will impact the reported operating profit, which .. expects to be broadly [equal to] FY2012. ..delay in product launches and a change in product component strategy by [apple].' and '..programme of material cost reductions.. focus on ..labour efficiency and productivity.. Further details will be provided .. on 31 October 2012.'
The new iphone has a smaller connector, and who knows what the iminipad will have. Apparently.. [can't remember where i read this]
'The 120-year-old London-based company racked up £3m in costs redesigning its products after Apple decided to do its bit for the environment with a move towards halogen-free power cables.. Broker Charles Stanley estimates around 30% of Volex's £320m annual revenues come from Apple, its largest customer.'
Investec: '..confronted by an unexpected cut in volume projections ..significant operationally-geared impact on profits ..30% reduction in our adjusted eps to 31c for 2013. However, the company is very robustly financed and remains likely to finish the year still with less than $5m of net debt. ..target price to 240p from 320p'
Here's my own questions:
- Revenues rose from 450 - 500m over 5 years. +2%pa. Over the same period net profit rose from 0 to 20m [the operational gearing referred to above]. Can it really take 450m revenue to break even?? Now say they lose half apple's revenue, ie 15% of 500m, it leaves 425m. or perhaps all of it, you're left with 350m, below the historical breakeven point..
- Nathaniel Rothschild's NR Investments owns nearly 24% of Volex. Is he a good man to emulate? If he decides to trim, that's a big overhang..
- What are Apple doing? Surely cabling is hardly a sector in decline, unless they produce some kind of super-efficient near-field charger, which seems possible. Currently these are developed for powering up internal medical devices and wet environment gadgets. But apparently the efficiency of energy transfer is very good. And I'd like one because sockets and plugs are the most breakable, and expensive parts.
On the other hand:
- 2 directors put in 30k between them following the bad news.
- the investment in halogen-free [whatever] cabling production could put them ahead of competitors if this is an industry trend.
- it's otherwise a strong company - debt paid off, divi increasing and is/was well covered. margins improving from wafer thin [to merely thin].
- hardly any goodwill on the books. all organic growth.
- £100m market cap with $40m cash [at end of year]. book value is $50m. pension deficit 3m, and $5m provisioned for bad property leases.
- ROE 40%.
- The Naked Trader likes 'em.
Is this a falling knife, or are the markets too much in awe of Apple? Was the management unwise to push the boat out for Apple's business? Is this good risk/reward? Is a 30% hit the sort blow to lay the company out?