XP Power — Q3 trading supports FY18 outlook

XP Power (LSE: XPP)

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Research: TMT

XP Power — Q3 trading supports FY18 outlook

XP Power’s Q3 trading update confirms strong revenue growth, despite currency headwinds, and good progress in design wins across all end markets. Q3 bookings growth has moderated slightly, partially reflecting uncertainty in the semiconductor sector over capex plans, but management is confident of achieving expectations set at its recent interim results; we leave our forecasts unchanged.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

XP Power

Q3 trading supports FY18 outlook

Q3 trading update

Tech hardware & equipment

8 October 2018

Price

3000p

Market cap

£578m

US$1.30:£1

Net debt (£m) at end Q318

49.3

Shares in issue

19.2m

Free float

90%

Code

XPP

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.7)

(16.4)

4.2

Rel (local)

0.2

(14.5)

4.7

52-week high/low

3,740p

2,850p

Business description

XP Power is a developer and designer of power control solutions with production facilities in China, Vietnam and the US, and design, service and sales teams across Europe, the US and Asia.

Next events

FY18 trading update

14 January 2019

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Dan Ridsdale

+44 (0)20 3077 5729

XP Power is a research client of Edison Investment Research Limited

XP Power’s Q3 trading update confirms strong revenue growth, despite currency headwinds, and good progress in design wins across all end markets. Q3 bookings growth has moderated slightly, partially reflecting uncertainty in the semiconductor sector over capex plans, but management is confident of achieving expectations set at its recent interim results; we leave our forecasts unchanged.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/16

129.8

28.6

115.3

71.0

26.0

2.4

12/17

166.8

36.1

147.0

78.0

20.4

2.6

12/18e

198.9

42.2

177.6

82.0

16.9

2.7

12/19e

219.4

47.2

198.4

85.0

15.1

2.8

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Strong 9M like-for-like revenue and bookings growth

XP received orders worth £153.3m in the nine months to 30 September 2018 (9M18), +11% y-o-y, +18% in constant currency and +8% on a like-for-like basis (excluding currency and acquisitions). In 9M18, the company reported revenues of £146.1m, +18% y-o-y, +24% in constant currency and 11% on a like-for-like basis; this equates to a book-to-bill of 1.05x for the period. As noted in July, the company has seen a shortage of components such as capacitors and has built its safety inventory to cope with extended lead times – this is factored into our gross margin assumptions for H218 and resulted in a small increase in net debt to £49.3m from £46.5m at the end of H118. The Q3 dividend of 19p is in line with our forecast.

Q3 order intake reflects moderation in demand

The 9M18 results imply Q3 order growth of 18% y-o-y/3% q-o-q and Q3 revenue growth of 21% y-o-y/14% q-o-q, with a book-to-bill of 0.98x. Considering that Q3 includes a full three months for the Glassman acquisition versus one month in Q2, this highlights a slight slowing in order growth which we assume relates to semiconductor production equipment (SPE) customers. Despite this, the company continues to see market share gains and good design win momentum across all end markets and anticipates that it will meet expectations as outlined at the end of July. We leave our estimates unchanged.

Valuation: Factors in moderating bookings growth

In the last three months, the stock has pulled back 16%, we believe in part due to concerns over weakening demand from SPE customers. We estimate that XP currently generates c 25% of revenues from the SPE sector so is not immune to weakening sector demand, but market share gains as well as robust demand in its other end markets should reduce the potential exposure. On a P/E basis, XP is trading at a premium to global power converter companies and at a small discount to UK electronics companies, with a dividend yield at the top end of the range. XP generates EBITDA and EBIT margins at the top end of its peer group.

Exhibit 1: Financial summary

£'m

2012

2013

2014

2015

2016

2017

2018e

2019e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

93.9

101.1

101.1

109.7

129.8

166.8

198.9

219.4

Cost of Sales

(49.0)

(51.5)

(51.0)

(55.1)

(67.8)

(89.2)

(108.1)

(119.0)

Gross Profit

44.9

49.6

50.1

54.6

62.0

77.6

90.8

100.4

EBITDA

 

 

23.3

26.0

27.6

29.7

33.0

41.7

49.2

55.0

Normalised operating profit

 

 

21.0

23.3

24.5

25.9

28.8

36.4

43.5

49.0

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

(0.4)

(0.6)

(1.4)

(1.2)

Exceptionals

0.0

0.0

0.0

(0.3)

(0.4)

(3.3)

(0.4)

0.0

Share-based payments

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Reported operating profit

21.0

23.3

24.5

25.6

28.0

32.5

41.7

47.8

Net Interest

(0.8)

(0.4)

(0.2)

(0.2)

(0.2)

(0.3)

(1.4)

(1.8)

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Exceptional & other financial

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

20.2

22.9

24.3

25.7

28.6

36.1

42.2

47.2

Profit Before Tax (reported)

 

 

20.2

22.9

24.3

25.4

27.8

32.2

40.4

46.0

Reported tax

(4.5)

(4.5)

(4.8)

(5.5)

(6.3)

(3.6)

(7.3)

(8.3)

Profit After Tax (norm)

15.7

18.4

19.5

20.2

22.3

28.8

34.7

38.7

Profit After Tax (reported)

15.7

18.4

19.5

19.9

21.5

28.6

33.1

37.7

Minority interests

(0.2)

(0.2)

(0.1)

(0.2)

(0.2)

(0.3)

(0.3)

(0.3)

Discontinued operations

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

15.5

18.2

19.4

20.0

22.1

28.5

34.4

38.5

Net income (reported)

15.5

18.2

19.4

19.7

21.3

28.3

32.9

37.5

Basic average number of shares outstanding (m)

19

19

19

19

19

19

19

19

EPS - basic normalised (p)

 

 

81.67

95.84

102.12

105.28

116.22

149.36

180.36

201.53

EPS - diluted normalised (p)

 

 

81.35

95.05

101.07

104.32

115.33

147.00

177.57

198.42

EPS - basic reported (p)

 

 

81.67

95.84

102.12

103.70

112.02

148.31

172.08

196.30

Dividend (p)

50

55

61

66

71

78

82

85

Revenue growth (%)

(9.4)

7.7

0.0

8.5

18.3

28.5

19.2

10.3

Gross Margin (%)

47.8

49.1

49.6

49.8

47.8

46.5

45.6

45.7

EBITDA Margin (%)

24.8

25.7

27.3

27.0

25.4

25.0

24.8

25.1

Normalised Operating Margin

22.4

23.0

24.2

23.6

22.2

21.8

21.9

22.3

BALANCE SHEET

Fixed Assets

 

 

52.8

53.3

56.1

65.4

73.2

88.1

127.2

131.2

Intangible Assets

38.1

39.1

40.5

48.2

53.0

63.9

92.3

93.8

Tangible Assets

13.2

12.7

14.4

16.1

19.1

22.5

33.2

35.7

Investments & other

1.5

1.5

1.2

1.1

1.1

1.7

1.7

1.7

Current Assets

 

 

39.3

42.2

47.0

53.5

65.7

83.5

93.2

108.2

Stocks

19.8

20.4

25.2

28.7

32.2

37.8

48.0

52.8

Debtors

14.2

15.4

16.0

17.5

21.5

23.8

30.0

33.1

Cash & cash equivalents

4.1

5.0

3.8

4.9

9.2

15.0

11.2

18.3

Other

1.2

1.4

2.0

2.4

2.8

6.9

4.0

4.0

Current Liabilities

 

 

(20.2)

(22.4)

(18.6)

(19.8)

(25.8)

(25.1)

(29.1)

(31.6)

Creditors

(11.1)

(12.7)

(14.4)

(14.6)

(16.1)

(21.4)

(25.4)

(27.9)

Tax and social security

(1.6)

(1.1)

(1.7)

(1.2)

(3.3)

(3.5)

(3.5)

(3.5)

Short term borrowings

(7.3)

(8.5)

(2.5)

(4.0)

(5.5)

0.0

0.0

0.0

Other

(0.2)

(0.1)

0.0

0.0

(0.9)

(0.2)

(0.2)

(0.2)

Long Term Liabilities

 

 

(10.6)

(3.7)

(4.2)

(10.0)

(6.2)

(29.6)

(61.6)

(56.6)

Long term borrowings

(7.4)

0.0

0.0

(4.6)

0.0

(24.0)

(56.0)

(51.0)

Other long term liabilities

(3.2)

(3.7)

(4.2)

(5.4)

(6.2)

(5.6)

(5.6)

(5.6)

Net Assets

 

 

61.3

69.4

80.3

89.1

106.9

116.9

129.6

151.1

Minority interests

(0.2)

(0.2)

(0.1)

(0.8)

(0.8)

(0.9)

(1.0)

(1.1)

Shareholders' equity

 

 

61.1

69.2

80.2

88.3

106.1

116.0

128.6

150.0

CASH FLOW

Op Cash Flow before WC and tax

23.3

26.0

27.6

29.7

33.0

41.7

49.2

55.0

Working capital

4.2

(0.3)

(4.1)

(4.6)

(6.1)

0.4

(12.3)

(5.4)

Exceptional & other

0.4

(0.5)

1.9

0.6

5.1

(6.3)

(0.4)

0.0

Tax

(4.3)

(5.0)

(3.6)

(4.7)

(4.1)

(6.1)

(4.4)

(8.3)

Net operating cash flow

 

 

23.6

20.2

21.8

21.0

27.9

29.7

32.1

41.3

Capex

(4.7)

(3.2)

(5.8)

(5.4)

(6.8)

(10.1)

(15.5)

(11.2)

Acquisitions/disposals

(1.6)

0.1

0.1

(8.3)

0.1

(18.3)

(35.6)

0.0

Net interest

(0.5)

(0.3)

(0.1)

(0.1)

(0.2)

(0.2)

(1.4)

(1.8)

Equity financing

(0.5)

0.1

(0.2)

0.0

0.2

(0.2)

0.0

0.0

Dividends

(9.1)

(10.1)

(11.0)

(12.2)

(13.1)

(14.2)

(15.5)

(16.2)

Other

0.5

0.2

0.1

0.2

0.0

0.0

0.0

0.0

Net Cash Flow

7.7

7.0

4.9

(4.8)

8.1

(13.3)

(35.8)

12.1

Opening net debt/(cash)

 

 

18.6

10.6

3.5

(1.3)

3.7

(3.7)

9.0

44.8

FX

0.3

0.1

(0.1)

(0.2)

(0.5)

0.7

0.0

0.0

Other non-cash movements

0.0

0.0

0.0

0.1

(0.2)

(0.1)

0.0

0.0

Closing net debt/(cash)

 

 

10.6

3.5

(1.3)

3.7

(3.7)

9.0

44.8

32.7

Source: XP Power, Edison Investment Research

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Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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