Downing Strategic Mico Cap I.T : Quarterly News Letter31 Aug 2021 09:58
Downing Strategic Micro Cap Quarterly new letter on Volex :-
https://assets-us-01.kc-usercontent.com/8c961317-6aee-00a7-e4b6-ae38cd847d2d/28cbb15e-1c16-4777-9292-7d9a2f8148ba/DSM3064_Downing%20Strategic%20Micro-Cap%20Investment%20Trust_Investor%20Letter_Aug%202021.pdf
VOLEX continues to impress us, so much so, that we have been adding modestly to our position on bad days – the market is becoming impatient, and we are more than happy to take advantage of this. The company reported an exceptional set of full year results which highlighted great progress across all divisions,
but particularly within the electric vehicle division which grew revenues by 193% to $53.1 million. The electronics division grew, aided by the acquisition of DE-KA which added $9.2 million of revenue and $1.8 million of adjusted
operating profit. Had DE-KA been owned for a full twelve months, the full year contributions would have been $60.7 million and $12.2 million, respectively. Medical was resilient and we are looking forward to a strong recovery
here. Also of note was progress in the industrial division, which includes data centre customers, which enjoyed strong growth and where an upgrade cycle could drive significant upside.
Management have consistently upgraded guidance since we have owned it and we think that there are several avenues for upside to consensus forecasts over the next year with current 2022 and 2023 adjusted operating profit
guidance at $52.0 and $56.9 million, respectively, versus $42.9 million delivered in FY2021. We present some of our upside assumptions below.
Firstly, assuming the full 12 months of DE-KA performance (rather than just two) would alone generate a small beat on the current $52.0 million forecast at just over $53.0 million. However, management have disclosed two key catalysts here – that they have won a significant new customer, and that they are investing in new manufacturing lines which will expand capacity by around 25%. We believe that most of this capacity expansion will be filled, such is the strength of current demand and that which will be introduced by the new large customer. Napkin maths
suggests that, all else equal, DE-KA alone could drive upside to the $52.0 million consensus of $2-4 million of adjusted operating profit on a fully annualised basis, with the capacity not likely to come online until H2 this year.
We keep margins constant in the above, but we would expect operating leverage to come through as more volume is put through facility.
Upside driver number two could lie in the electric vehicle (EV) segment which posted rapid growth this year, from $18.1 million in FY20 to $53.1 million in FY21. Consensus for this year indicates revenue estimates within EV of
around $70 million. Based on reported growth rates, we think this could be conservative. Whilst H1 electric vehicle revenues were not disclosed, we think these were likely $12.0-15.0 million and we think that H1 exited at around
$5 million per
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