XP Power — Reflecting a tougher trading environment

XP Power (LSE: XPP)

Last close As at 21/11/2024

GBP13.16

10.00 (0.77%)

Market capitalisation

GBP310m

More on this equity

Research: TMT

XP Power — Reflecting a tougher trading environment

The trading environment for XP Power has become more uncertain in recent months, with the US imposing higher tariffs on imports from China and threatening tariffs on imports from Mexico. At the same time, demand for semiconductors and consequently semiconductor equipment remains weak. We have revised down our revenue and EPS forecasts to reflect the combination of weaker demand and pressure on margins; despite this the valuation does not look challenging.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

XP Power

Reflecting a tougher trading environment

Sector news flow

Tech hardware & equipment

20 June 2019

Price

2,260p

Market cap

£432m

$1.25/£

Net debt (£m) at 31 March 2019

49.1

Shares in issue

19.1m

Free float

90%

Code

XPP

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(11.0)

(9.6)

(35.4)

Rel (local)

(11.4)

(10.2)

(33.0)

52-week high/low

3,620p

1,965p

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

H119 results

1 August 2019

Analyst

Katherine Thompson

+44 (0)20 3077 5730

XP Power is a research client of Edison Investment Research Limited

The trading environment for XP Power has become more uncertain in recent months, with the US imposing higher tariffs on imports from China and threatening tariffs on imports from Mexico. At the same time, demand for semiconductors and consequently semiconductor equipment remains weak. We have revised down our revenue and EPS forecasts to reflect the combination of weaker demand and pressure on margins; despite this the valuation does not look challenging.

Year end

Revenue (£m)

PBT*
(£m)

Diluted EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/17

166.8

36.1

147.0

78.0

15.4

3.5

12/18

195.1

41.2

172.8

85.0

13.1

3.8

12/19e

199.8

38.4

160.8

88.0

14.1

3.9

12/20e

209.0

41.6

173.8

92.0

13.0

4.1

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

Trade tariff situation worsens

In May, the US increased trade tariffs from 10% to 25% on a variety of goods imported from China, including XP’s power converters. At the same time, China has imposed tariffs on imports from the US. As XP manufactures in China and Vietnam, not all US imports of XP products incur the tariffs. XP is trying to mitigate the effect by qualifying more products in Vietnam, but this process takes time and in the meantime, the tariffs are creating uncertainty and pressure on margins. While the tariffs on Mexican imports to the US have been suspended for now, these could be reinstated and while not affecting XP directly, they could negatively affect demand for capital equipment in the US.

Semiconductor market still subdued

Reports from semiconductor production equipment manufacturers in recent months confirm that demand for semiconductor equipment remains weak. While logic and foundry chip manufacturers are seeing signs of improvement, the memory market continues to suffer from oversupply. The bottom in the market has not yet been confirmed and could shift out further into H219. On the back of the tariff situation and weaker demand for semiconductors, we have revised down our forecasts. In FY19, we now factor in a 20% decline in the semiconductor business and reduce growth in the rest of the business from 5% to 2.5%, which cuts revenues by 5% in FY19 and FY20 and reduces normalised EPS by 12.7% in FY19 and 9.7% in FY20. While our net debt forecast increases, we estimate that net debt/EBITDA will only increase from 0.8x to 1.0x by the end of FY19.

Valuation: Share price already factoring in weakness

The share price has pulled back from its year-to-date high of 2,670p at the end of April reflecting the weaker trading environment. On our revised forecasts, XP is trading on a P/E of 14.1x for FY19e and 13.0x FY20e, still at a substantial discount to power converter peers as well as UK electronics companies. XP’s dividend yield is also at the top end of the peer group range.

Changes to forecasts

Exhibit 1: Changes to forecasts

£m

FY19e

FY19e

FY20e

FY20e

Old

New

Change

y-o-y

Old

New

Change

y-o-y

Revenues

210.3

199.8

(5.0%)

2.4%

220.0

209.0

(5.0%)

4.6%

Gross profit

97.5

88.9

(8.9%)

(3.7%)

102.7

96.0

(6.5%)

8.0%

Gross margin

46.4%

44.5%

(1.9%)

(2.8%)

46.7%

45.9%

(0.7%)

1.5%

EBITDA

52.9

47.4

(10.5%)

(3.8%)

55.8

51.3

(7.9%)

8.4%

EBITDA margin

25.2%

23.7%

(1.4%)

(1.5%)

25.3%

24.6%

(0.8%)

0.9%

Normalised operating profit

45.7

40.2

(12.1%)

(6.4%)

47.8

43.3

(9.3%)

7.9%

Normalised operating profit margin

21.7%

20.1%

(1.6%)

(1.9%)

21.7%

20.7%

(1.0%)

0.6%

Reported operating profit

39.8

34.3

(13.9%)

(12.8%)

42.9

38.4

(10.3%)

12.2%

Reported operating margin

18.9%

17.1%

(1.8%)

(3.0%)

19.5%

18.4%

(1.1%)

1.2%

Normalised PBT

43.9

38.4

(12.6%)

(6.8%)

46.0

41.6

(9.6%)

8.3%

Reported PBT

38.0

32.5

(14.6%)

(13.6%)

41.1

36.7

(10.8%)

12.9%

Normalised net income

35.8

31.3

(12.7%)

(7.1%)

37.4

33.8

(9.7%)

8.1%

Reported net income

30.9

26.4

(14.7%)

(12.6%)

33.4

29.8

(10.8%)

13.0%

Normalised basic EPS (p)

187.7

163.9

(12.7%)

(6.9%)

196.1

177.1

(9.7%)

8.1%

Normalised diluted EPS (p)

184.2

160.8

(12.7%)

(6.9%)

192.4

173.8

(9.7%)

8.1%

Reported basic EPS (p)

162.1

138.2

(14.7%)

(12.4%)

175.2

156.2

(10.8%)

13.0%

Dividend per share (p)

88.0

88.0

0.0%

3.5%

92.0

92.0

0.0%

4.5%

Net debt/(cash)

43.3

49.0

13.3%

(5.8%)

31.8

37.1

16.7%

(24.4%)

Source: Edison Investment Research


Exhibit 2: Financial summary

£m

2012

2013

2014

2015

2016

2017

2018

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

93.9

101.1

101.1

109.7

129.8

166.8

195.1

199.8

209.0

Cost of Sales

(49.0)

(51.5)

(51.0)

(55.1)

(67.8)

(89.2)

(102.8)

(110.9)

(113.0)

Gross Profit

44.9

49.6

50.1

54.6

62.0

77.6

92.3

88.9

96.0

EBITDA

 

 

23.3

26.0

27.6

29.7

33.0

41.7

49.2

47.4

51.3

Normalised operating profit

 

 

21.0

23.3

24.5

25.9

28.8

36.4

42.9

40.2

43.3

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

(0.4)

(0.6)

(2.8)

(4.4)

(4.4)

Exceptionals

0.0

0.0

0.0

(0.3)

(0.4)

(3.3)

(0.8)

(1.0)

0.0

Share-based payments

0.0

0.0

0.0

0.0

0.0

0.0

0.0

(0.5)

(0.5)

Reported operating profit

21.0

23.3

24.5

25.6

28.0

32.5

39.3

34.3

38.4

Net Interest

(0.8)

(0.4)

(0.2)

(0.2)

(0.2)

(0.3)

(1.7)

(1.8)

(1.8)

Joint ventures & associates

0.0

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

0.0

Profit Before Tax (norm)

 

 

20.2

22.9

24.3

25.7

28.6

36.1

41.2

38.4

41.6

Profit Before Tax (reported)

 

 

20.2

22.9

24.3

25.4

27.8

32.2

37.6

32.5

36.7

Reported tax

(4.5)

(4.5)

(4.8)

(5.5)

(6.3)

(3.6)

(7.2)

(5.8)

(6.6)

Profit After Tax (norm)

15.7

18.4

19.5

20.2

22.3

28.8

33.9

31.5

34.1

Profit After Tax (reported)

15.7

18.4

19.5

19.9

21.5

28.6

30.4

26.6

30.1

Minority interests

(0.2)

(0.2)

(0.1)

(0.2)

(0.2)

(0.3)

(0.2)

(0.3)

(0.3)

Discontinued operations

0.0

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

33.7

31.3

33.8

Net income (reported)

15.5

18.2

19.4

19.7

21.3

28.3

30.2

26.4

29.8

Basic ave. number of shares outstanding (m)

19

19

19

19

19

19

19

19

19

EPS - basic normalised (p)

 

 

81.7

95.8

102.1

105.3

116.2

149.4

176.1

163.9

177.1

EPS - diluted normalised (p)

 

 

81.3

95.1

101.1

104.3

115.3

147.0

172.8

160.8

173.8

EPS - basic reported (p)

 

 

81.7

95.8

102.1

103.7

112.0

148.3

157.8

138.2

156.2

Dividend (p)

50

55

61

66

71

78

85

88

92

Revenue growth (%)

(9.4)

7.7

0.0

8.5

18.3

28.5

17.0

2.4

4.6

Gross Margin (%)

47.8

49.1

49.6

49.8

47.8

46.5

47.3

44.5

45.9

EBITDA Margin (%)

24.8

25.7

27.3

27.0

25.4

25.0

25.2

23.7

24.6

Normalised Operating Margin

22.4

23.0

24.2

23.6

22.2

21.8

22.0

20.1

20.7

BALANCE SHEET

Fixed Assets

 

 

52.8

53.3

56.1

65.4

73.2

88.1

129.2

138.1

140.7

Intangible Assets

38.1

39.1

40.5

48.2

53.0

63.9

97.7

100.4

100.0

Tangible Assets

13.2

12.7

14.4

16.1

19.1

22.5

30.7

36.9

39.9

Investments & other

1.5

1.5

1.2

1.1

1.1

1.7

0.8

0.8

0.8

Current Assets

 

 

39.3

42.2

47.0

53.5

65.7

83.5

105.1

104.2

110.6

Stocks

19.8

20.4

25.2

28.7

32.2

37.8

56.5

57.7

55.7

Debtors

14.2

15.4

16.0

17.5

21.5

23.8

33.0

32.8

34.4

Cash & cash equivalents

4.1

5.0

3.8

4.9

9.2

15.0

11.5

9.5

16.4

Other

1.2

1.4

2.0

2.4

2.8

6.9

4.1

4.1

4.1

Current Liabilities

 

 

(20.2)

(22.4)

(18.6)

(19.8)

(25.8)

(25.1)

(26.8)

(29.5)

(30.3)

Creditors

(11.1)

(12.7)

(14.4)

(14.6)

(16.1)

(21.4)

(22.4)

(25.1)

(25.9)

Tax and social security

(1.6)

(1.1)

(1.7)

(1.2)

(3.3)

(3.5)

(4.2)

(4.2)

(4.2)

Short term borrowings

(7.3)

(8.5)

(2.5)

(4.0)

(5.5)

0.0

0.0

0.0

0.0

Other

(0.2)

(0.1)

0.0

0.0

(0.9)

(0.2)

(0.2)

(0.2)

(0.2)

Long Term Liabilities

 

 

(10.6)

(3.7)

(4.2)

(10.0)

(6.2)

(29.6)

(70.1)

(65.1)

(60.1)

Long term borrowings

(7.4)

0.0

0.0

(4.6)

0.0

(24.0)

(63.5)

(58.5)

(53.5)

Other long term liabilities

(3.2)

(3.7)

(4.2)

(5.4)

(6.2)

(5.6)

(6.6)

(6.6)

(6.6)

Net Assets

 

 

61.3

69.4

80.3

89.1

106.9

116.9

137.4

147.7

160.8

Minority interests

(0.2)

(0.2)

(0.1)

(0.8)

(0.8)

(0.9)

(1.0)

(1.1)

(1.1)

Shareholders' equity

 

 

61.1

69.2

80.2

88.3

106.1

116.0

136.4

146.6

159.7

CASH FLOW

Op Cash Flow before WC and tax

23.3

26.0

27.6

29.7

33.0

41.7

49.2

47.4

51.3

Working capital

4.2

(0.3)

(4.1)

(4.6)

(6.1)

0.4

(21.6)

1.6

1.4

Exceptional & other

0.4

(0.5)

1.9

0.6

5.1

(6.3)

3.2

(1.0)

0.0

Tax

(4.3)

(5.0)

(3.6)

(4.7)

(4.1)

(6.1)

(4.1)

(5.8)

(6.6)

Net operating cash flow

 

 

23.6

20.2

21.8

21.0

27.9

29.7

26.7

42.1

46.1

Capex

(4.7)

(3.2)

(5.8)

(5.4)

(6.8)

(10.1)

(15.0)

(20.5)

(15.0)

Acquisitions/disposals

(1.6)

0.1

0.1

(8.3)

0.1

(18.3)

(35.4)

0.0

0.0

Net interest

(0.5)

(0.3)

(0.1)

(0.1)

(0.2)

(0.2)

(1.5)

(1.8)

(1.8)

Equity financing

(0.5)

0.1

(0.2)

0.0

0.2

(0.2)

0.6

0.0

0.0

Dividends

(9.1)

(10.1)

(11.0)

(12.2)

(13.1)

(14.2)

(15.6)

(16.8)

(17.4)

Other

0.5

0.2

0.1

0.2

0.0

0.0

0.0

0.0

0.0

Net Cash Flow

7.7

7.0

4.9

(4.8)

8.1

(13.3)

(40.2)

3.0

11.9

Opening net debt/(cash)

 

 

18.6

10.6

3.5

(1.3)

3.7

(3.7)

9.0

52.0

49.0

FX

0.3

0.1

(0.1)

(0.2)

(0.5)

0.6

(2.7)

0.0

0.0

Other non-cash movements

0.0

0.0

0.0

0.1

(0.2)

0.0

(0.1)

0.0

0.0

Closing net debt/(cash)

 

 

10.6

3.5

(1.3)

3.7

(3.7)

9.0

52.0

49.0

37.1

Source: XP Power, Edison Investment Research

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Frankfurt +49 (0)69 78 8076 960

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Premier Technical Services — Suspension of estimates

For the purposes of the Takeover Code, Edison Investment Research is deemed to be connected with Premier Technical Services. Under Rule 20.1 Edison must not include any profit forecast, quantified financial benefits statement, asset valuation or estimate of other figures key to the offer, except to the extent that such forecasts, statements, valuations or estimates have been published prior to the offer period (as defined in the Takeover Code) by an offeror or the offeree company (as appropriate) in accordance with the requirements of the Code.
Consequently we have removed our estimates until the Offer Period ends.

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