We think power cords and cable assembly company Volex (VLX:AIM) can achieve double digit growth driven by a proven acquisition strategy and increasing demand for EVs (electric vehicles) and data centres.

Cables and power cords might sound like a dull business, but they are essential kit for many industries, from consumer electronics and medical imaging equipment, to fast growing data centres and EV charging.

A new management team came on board in 2016 led by executive chairman Nat Rothschild and they have engineered an impressive turnaround.

Operating margins have increased from less than 2% to around 10%, which management believe is sustainable given the operational changes made to the business. The company is now more resilient and geographically diversified.

Although the shares are up 10-fold over the last five years, that doesn’t reflect the even bigger improvement in profitability with adjusted operating profit up more than 11-fold.

Having fixed profitability, management have targeted top-line growth. The goal is to expand revenues and operating profit to $650 million and $65 million respectively by 2024.

This represents roughly 50% growth on the just reported (17 June) 2021 figures which delivered the strongest performance in 20 years.

Nat Rothschild told Shares that the company ‘had a good runway’ for growth.

Mergers and acquisitions will play a key role in achieving the growth targets. In the last three years Volex has executed six acquisitions investing over $100 million.

The company says it has a strong pipeline of quality targets and is aiming acquisitions to contribute 10% annualised growth.

Each deal must satisfy strict criteria including deepening customer relationships, providing greater valued-added capabilities, and increasing geographical exposure.

The auto industry’s move to electric vehicles has created a strong driver for the group’s power cords business which has been enhanced by the company’s experience in the technology associated with electric vehicle charging.

In the year to 4 April 2021 revenue grew 193% year-on-year to $53.1 million and Volex is actively investing to increase its range of products in this area.

Volex generates around $42 million of revenues from providing power cords and equipment to data centres. The move towards remote working has increased the demand for cloud-based services which in turn has increased the utilisation of data centres.

Exposure to these fast-growing industries which make up around 20% of revenue combined, together with a strong pipeline of acquisitions, should provide a potent cocktail for growth.

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