An interesting article appeared on ValueVista, http://is.gd/fWsCTA, who concluded “Companies like Volex, with little to no competitive advantage, are the ones to avoid.”
He notes a number of points:
1. A new CEO was brought in earlier this year and there have been big changes in the Board too.
2. Constant churn creates new problems rather than addressing old ones. It may also be a sign that the company faces secular rather than cyclical problems.
3. The best way to assess a turnaround CEO is to look at his plans … picking better margin business, improving the sales organization, and cutting costs.
4. I am not sure that shareholders have seen any evidence of these measures taking effect.
The author sites these as reasons not to buy, but actually, I’m going to suggest that they might actually be quite bullish. Here’s why …
The mess that VLX finds itself in is history. It’s what happens next that’s important. A change in management should at least offer scope that VLX can at least begin to address the problems it finds itself in. So rather than the churn being considered a negative, I would consider it a positive. I also think that the turnaround strategy of sorting out the margins, improving sales, and cutting costs is a classic recovery story. As regards lack of evidence of the turnaround, I would say that it is too early to judge. We need another 6-12 months before we see anything bearing fruit.
VLX has an EV/Sales of 0.31, compared with a sector median of 2.26. So there’s a possibility of a re-rating if the turnaround kicks in.
VLX has a turnover of around £300m. If it can achieve industry margins of around 7.4%, then its net profits should be in the region of £22.2m. Assuming a multiple of 13X, that would give a valution of £288m. The sector usually operates with very little debt, and VLX has about £12m. So let’s say that the market cap of the company is fair at £277m (288m-12m). The company currently has a market cap of £71m; so again, there is significant “potential” upside in a re-rating. Even if you thought that after restructuring VLX could only do £200m in turnover, that would put fair value on the company at £180m, still over double the current valuation.
I do have a small shareholding in VLX. It looks like a classic turnaround play to me – although naturally only hindsight will reveal if theory and reality are the same.