Volex Share Discussion Threads

[don777] 21/11/2013 12:39

good call for those averaged at the first day drop.

most of them are breaking even or in profit now.

[supasapi] 20/11/2013 21:08

good close, not as gloomy now

[deanowls] 20/11/2013 13:28

A certain large shareholder may prevent that happening I would imagine.

[mikepompeyfan] 20/11/2013 11:45

Short term can only hope all the hints at vlx being a takeover target in that report are well founded.

[imastu pidgitaswell] 20/11/2013 11:26

Matt,

Re the valuation disparity, it's essentially the difference between basing off an EBITDA projection which is itself based on existing (inefficent) profitability and basing off a profitability being a percentage of sales (i.e an efficient profitability - which they do not currently do but in ideal world could do, as their competitors do).

Basically a bit of classic spreadsheet accounting, and indeed one of the reasons I bought these - if they manage to work efficiently, then there is potential. But it's a hell of a big 'if' with many hurdles along the way.

Meantime, despite a lot of selling since the results, the price is rising. A bit. Maybe somebody believes the narrative? Or is just buying either speculatively or with a 'higher purpose' (I can dream)...

[paulypilot] 19/11/2013 19:33

Hi Thorpematt,

I see where you are coming from, but my method was more broad brush - just to reflect that turnover had gone down, therefore one would expect debtors, stock, and creditors to all have fallen simultaneously over a 12 month period, and by a similar proportion roughly.

As stock and creditors are most closely linked, it's not unreasonable to have expected both to have fallen about the same percentage in a shrinking turnover business.

In fact, in the year to 30 Sep 2013, Stock fell 28%, Debtors fell 15%, and trade creditors fell 39%. Therefore clearly there has been some impact from a policy of paying creditors more quickly, as well as a general shrinking in trade creditors to reflect reduced turnover.

Trade creditors shrank by 28% to $72,978k, which is a reduction of $28.4m. However, that is NOT all due to paying suppliers more quickly. I estimate that about $10.7m is due to the policy change to pay more quickly, and the balance of $17.7m reduction would have happened naturally from the business having shrunk over the year in question, if supplier payment times had remained the same.

So my main point remains - that actually most of the increase in net debt was caused by heavy capex last year, and not by paying creditors faster (although that probably had about $10m impact).

Cheers, Paul.

[thorpematt] 19/11/2013 18:58

paulypilot,
I respectfully suggest that you may of over-thought your calculation for debt increase relating to supplier policy change:

I estimate it at $22.4m. This would be consistent with the commentary: "primarily due to a change in supplier payment profiles following a strategic decision to move to a multi-sourcing supplier model.

So primarily being around 61% in my calc.

I believe you application of a "proportion-to-stock" calculation to be inappropriate. (Although not in a "co-op" kind-of in-apropriate way :-/ more of a mathematical way:

VLX has $39m less outstanding payables - it's paid this to suppliers earlier, or bought less.

VLX has $17m less stock.

Thus movement needed $22m of cash to do so.

The % of run down is not relevant. It could run it down by 50% or 100% for all we care. The fact is it's "paid back" $39m and has $17m less stock.

On that basis I would tend to "believe" VLX assertion that net debt is likely to come down especially since the cap-ex is now tailed off. So no covenant worries, (as they say in Australian banking circles...possibly).

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Incidently I have no idea how analysts gather a valuation of 100p then 300p. I use 3 valuation methods myself. (Mostly Ben Graham, but also my own permutations). They vary by a maximum of 24p.

I reckon the bad news is out. Frankly I also reckon this company has shown very poor real returns for a decade (and I always use a decade). look at it's EPS growth, it's book value growth indeed even the share price Absolute bag of s@#!e compared to sector. What it does have is global footprint - impressive at this MC and something to value.

I think it was Peter Lynch who said: "find a business any idiot can run 'cos sooner or later any idiot will".

Well now that there is strong management perhaps we'll start to see the potential.

I might even invest myself...

[paulypilot] 19/11/2013 17:10

Hi imastu,

"I guess also they would not go down the route of making their working capital $20m worse deliberately (as they have just done), if they were putting themselves under covenant pressure?"

Absolutely, that's what I was thinking too. They must be reasonably OK with bank covenants, otherwise speeding up supplier payments would be suicidal.

I've done some quick calculations to verify how much of the increase in net debt in the past year is actually due to paying suppliers more quickly, and it drops out at an impact of about $10.8m increased net debt.

(I calculated this by looking at how much stock had reduced by year on year, and it had fallen by 28%, so if you then drop trade creditors by the same percentage, to arrive at an expected level of trade creditors at 29 Sep 2013, the figure is $73.0m. Since actual reported trade creditors at 29 Sep 2013 was $62.2m, then the difference of $10.8m is a rough estimate as to how much the policy to speed up supplier payments has increased net debt by).

So the bulk of the increase in net debt from $4.6m to $41.4m is actually due to other factors, the obvious one being capex.
There was $24.9m capex in the year to 31 Mar 2013, although that has now slowed sharply to only $4.0m in H1 of the current year, so it looks like they are mostly done in terms of modernising their factories.


It looks like there probably isn't any immediate cause for alarm on the banking situation, although it's too highly geared for my liking on current levels of trading. That won't matter if the trading turnaround is executed well, but it could become a serious issue if trading does not improve.

They would probably be wise to do an equity fundraising of say $20-30m to reduce the bank debt before the facility comes up for renewal in 2015, in my opinion.

Regards, Paul.

[imastu pidgitaswell] 19/11/2013 15:41

Re the covenant - the only comment I would make is that the analyst (commissioned and informed by the company...) states that (page 19)

"The financial performance and condition of Volex may be adversely impacted if the group was not to meet its financial covenants. With Volex well within its financial covenants, we see this as an unlikely scenario."

And also page 14:

"Balance sheet and cash flow
Primarily due to a change in supplier payment profiles following a strategic decision to move to a multi-sourcing supplier model as Volex seeks to become more cost competitive, we are forecasting the impact of working capital movements on the cash flow for FY14 to be $14.54m. We are therefore forecasting an adjusted Free Cash Flow (FCF) outflow of $21.25m for FY14, swinging to an inflow of $3.71m for FY15 and rising to $5.73m for FY16. As a result, we anticipate net debt will rise to around the $50m by FY14 year end. However, with both facility expansion plans and the restructuring cost-reduction programmes coming to an end, any future changes in net debt should reflect the underlying business performance. Volex is well within its banking facility limit of $75m and banking covenants. Overall, the balance sheet is healthy."

I guess also they would not go down the route of making their working capital $20m worse deliberately (as they have just done), if they were putting themselves under covenant pressure?

[imastu pidgitaswell] 19/11/2013 15:37

Or more precisely, they reflect the company's view of its prospects - page 26:

Disclaimer: This research note cannot be regarded as impartial as GECR has been commissioned by the company to which this research relates. It should be regarded as a marketing communication. T1ps.com Limited, which GECR is a subsidiary of, is one of a diverse group of companies...etc etc

The basis of valuation is somewhat dubious (imho) - two versions based on earnings (actually EBITDA and EBIT) produce valuations in the 140s, whereas the versions based on sales (i.e. ignoring the actuality of the inefficiencies) produce valutions of 500+ and 400+. So they 'blend' them and come up with 300.

Maybe it's just me but I find that sort of approach a bit silly - would it not make more sense to assess which scenario is more likely and base a valuation on that, rather than just ignore the ridiculous disparity and halve the difference?

It's not without merit, the analysis, I just think it's a bit heroic in its valuation approach...

As a holder, I should just my gob shut though.

[paulypilot] 19/11/2013 15:36

Hi,

I'm out for the moment, as the timing of the turnaround seems to have stretched further out, with only stabilisation of trading expected in H2.

Also, net debt is now quite a big issue, and needs clarifying in my opinion. The last Annual Report says that the company has 2 financial convenants connected with the $75m syndicated banking facilities (which expire in 2015). One is for interest cover, which should probably be OK (although the actual level of the covenant is not stated, so that's a guess on my part).

The more important covenant is Net debt : EBITDA (12 month rolling).

According to the recent (commissioned) note from GECR, 2014 EBITDA will be $14.6m, and 2014 forecast net debt will be $51.6m at the year end.
Therefore that is a ratio of EBITDA to net debt of 3.53 times, which strikes me as rather high.

Again, it doesn't state in their last Annual Report what the banking covenant actually is, in terms of the ratio level which would trigger a breach. Personally I don't usually feel comfortable with Net Debt more than about 1.5 times EBITDA, and I've recently been told by a Listed company FD that that is also the level where Banks are generally comfortable.

So in this case, the crux of the matter is this - what is the Bank Covenant for Net debt to EBITDA? If it's 3, then the GECR figures imply a breach of that covenant by the end of the current financial year.

If it's 4, then they have a bit of headroom, but not a huge amount.

If it's 5, then they look to have enough headroom, providing trading doesn't deteriorate further.

I Tweeted to the analyst who wrote the GECR note raising this question, and await a response.


Also, it would be useful to find out what scope they have to delay payments to suppliers if necessary to avoid a breach of the banking covenants? If it's a matter of just lengthening supplier payment terms again, then that would be OK - i.e. it would get net debt lower, but would have some P&L impact as prices were raised against them.


I'd be happy to buy back into Volex once I'm satisfied that a turnaround is indeed occurring, and once the position re banking covenants has been clarified.

In the meantime, good luck to holders.

Regards, Paul.

[imastu pidgitaswell] 19/11/2013 15:09

304p.

Hmmmmm.


Well at least they make their own mind up, unlike the rest of the lemmings...

[windass] 19/11/2013 14:47

Initiation report out from GECR

[bones] 18/11/2013 18:04

I've decided to reduce my positions here to make it a speculative but small one. I have a feeling this could have a few bad days despite the recovery potential and I don't need the volatility in a larger holding. There is no doubt the IMS was rougher than expected on reflection.

[deanowls] 18/11/2013 14:33

Don't know Sharman, would be good if they did.

Theyalsoneed to get their finger out on these optical thingamajigs that were going to save us six months ago.

[bsharman3] 18/11/2013 14:05

Does anyone know if Volex produce anything for the new Sony Playstation 4 (Sales expected to be 5 million units before Christmas)and the Xbox One - which is going on sale next week.

[mikepompeyfan] 18/11/2013 13:11

Volex (VLX) has lost a quarter of its value after falling victim to a vicious price war in Asia and customer product delays. Even with $7m (£4.4m) of cost cuts, and after stripping out $5.8m of redundancy costs and write-downs, the power cable and electrical components supplier made just $98,000 profit during the first half. It's axed the dividend, too, and while a transformation plan should at least stabilise the business, investors are being asked to place a lot of faith in the new management team.

Bosses have already restructured the company into two divisions. Hardest hit was the new power cable unit where high fixed costs meant a 24.9 per cent dive in sales and a 58 per cent slide in underlying operating profit to $3.9m. But new chief executive Christoph Eisenhardt has spent his first four months in charge improving relations with existing clients and courting potential new ones, and Volex is tightening up on design costs. There's potential at the higher-margin data division, too. Here, cost-cutting easily offset a double-digit drop in sales and profit grew 7 per cent during the period to $5.7m. Given high operational gearing, management is confident that a resumption of volume growth will rapidly inflate the bottom line.

Inevitably, full-year earnings forecasts have been slashed and broker Investec Securities now expects adjusted pre-tax profit of just $3.1m, down from $10.1m last year, giving adjusted EPS of 3.6¢ ($11.2¢ in 2013)

IC VIEW:
Analysts expect a rapid recovery next year and we think the experienced new management team are worth backing. Speculative buy.

[zoolook] 18/11/2013 12:59

Ive had second thoughts on this after reading Paul Scott's comments and sold this morning for a small gain. Good luck to holders.

[wylecoyote] 18/11/2013 12:52

Bones,

completly correct. However, it should be pointed out that I studied this over the weekend and can clearly see where I made my mistakes. I have been interested in VLX for a while now and thought that it had great potential and seemed to have a track record until the last 18 months I incorrectly assumed that the chart pattern suggested that the market anticipated improving fortunes. I thought it was a short term hickup. Reading through the RNS's over the last 18 months it is apparent that they are continuing to struggle. Yes, it looks cheap, but it is going to get cheaper. In July for the period ending 30/06/2013 net debt was around $10million(actually, I thought this was a good sign), in period ending 29/09/2013 it is $43million. A considerable jump in such a short space of time. Cash flow is dire too.

People on here talk about 'kitchen sinking', at a guess I assume they mean that the new management team issue all the bad news now. Fair enough, but they have not issued anything tangible going forward and it is difficult to manipulate the net debt and cash flow statements.

So yes, this is a potential recovery story, but I will not jump in until I see some positive numbers.

[deanowls] 18/11/2013 12:45

Anyone know whether we supply Sony for the ps4? Four million sold on the first day.


Wyle rushes off to check?

[toffeeman] 18/11/2013 11:44

Revenue is a wish best served at all!

[bones] 18/11/2013 10:11

Revenge is a dish best served cold Wyle!

[wylecoyote] 18/11/2013 09:01

why? what improving fundamentals will support the SP? In addition, DIA was shorted for less.

[naed] 18/11/2013 08:58

Brave man Wyle

[wylecoyote] 18/11/2013 08:32

Well, I have opened a short at 96.0p and my first target is 80.0p. Oh yeah the spread is getting wierd again.