Refinanced for recovery
Early indications of progress under new strategic direction are seen in FY14 results (which should represent trough earnings). Volex Plc (LONDON:VLX) is raising c $30m new equity and the associated interest benefit and EPS dilution are the primary changes to estimates. The valuation acknowledges a short-term recovery, but we consider medium-term upside is somewhat greater (PBT in 2012 was $28m) and this is still to be reflected in the share price.
A down year, but Power revenue improves in H2
FY14 EBIT came in at the lower end of a previously flagged consensus range and slightly below our own estimates. Deferred tax resulted in a post-tax loss, negative EPS and, as expected, no DPS was declared. Year-end net debt of $32m was as per a pre-close IMS (30 April). Revenue was in line with our forecast at $400m (-15%), with H2 showing a lower y-o-y decline and in fact exceeding H1. Power Products drove this and, with slightly softer margins also, diluted group gross margin. Below this, there was good evidence of overhead cost control compared to FY13. Exceptionals – largely but not solely headcount change and reductions – totalled $11m and included some banking-related costs.
Balance sheet refinanced
Volex also announced an underwritten $30.3m/£18.1m placing and open offer (24m new shares at 75p), subject to shareholder approval on 1 July, to all but wipe out net debt. Revised banking facilities ($45m to 2017, previously $75m) have also been put in place. Refinancing helps to draw a line under previous management’s strategy, which started to unravel in H212. Under the new team, signs of recovering revenue and margin solidity (especially in Power) are near-term targets to build towards full-blown recovery. FY15 trading to date is consistent with this (based on current order schedules, Q1 looks to be +10% y-o-y and +4% sequentially). Beyond this, delivering sustainable growth is a key business target.
Valuation: Scope for a re-rating
Our PBT estimates are up 11% and 8% respectively for FY15 and FY16 (lower interest costs more than offsetting a lower assumed margin, albeit on better revenue) with reduced EPS reflecting increased shares in issue. Fund-raisings have been well supported, although the share price performance during 2014 has been disappointing (-31% ytd). The current year P/E ratio of 25.1x falls to 19.9x one year out (EV/EBITDA on the same basis 6.7x and 6.4x). This, to us, highlights the near term-term recovery phase. Comparing these estimates with past profitability suggests there is scope for material medium-term upgrades.
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