XP Power — Revising forecasts to reflect weaker semis sector

XP Power (LSE: XPP)

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Research: TMT

XP Power — Revising forecasts to reflect weaker semis sector

As previously flagged, a drop in demand from XP’s semiconductor customers had a negative impact on Q4 revenues and orders. Conversely, demand from all other end-markets remained strong. With FY18 revenues likely to be 2% lower than we had expected, we have revised our forecasts to reflect this and expected weaker demand from the semiconductor sector in FY19. Despite the resulting 5% cut in EPS forecasts for FY19, the stock is trading at a discount to peers, with a superior dividend yield.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

XP Power

Revising forecasts to reflect weaker semis sector

Trading update

Tech hardware & equipment

14 January 2019

Price

2,240p

Market cap

£434m

$1.28:£1

Net debt (£m) at end FY18

52.5

Shares in issue

19.4m

Free float

90%

Code

XPP

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.0

(13.9)

(38.3)

Rel (local)

(2.1)

(12.7)

(30.8)

52-week high/low

3740p

2000p

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 results

5 March 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

As previously flagged, a drop in demand from XP’s semiconductor customers had a negative impact on Q4 revenues and orders. Conversely, demand from all other end-markets remained strong. With FY18 revenues likely to be 2% lower than we had expected, we have revised our forecasts to reflect this and expected weaker demand from the semiconductor sector in FY19. Despite the resulting 5% cut in EPS forecasts for FY19, the stock is trading at a discount to peers, with a superior dividend yield.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/16

129.8

28.6

115.3

71.0

19.4

3.2

12/17

166.8

36.1

147.0

78.0

15.2

3.5

12/18e

194.8

40.7

170.5

84.0

13.1

3.8

12/19e

210.3

43.9

187.9

87.0

11.9

3.9

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

Q418 revenues and orders see sequential decline

XP expects to report Q4 revenues of £48.9m (+14% y-o-y/+12% constant currency/ -8% q-o-q) and orders of £45.1m (-4% y-o-y/-6% cc/-13% q-o-q). Weakness from the semiconductor sector (c 25% of revenues) had already been flagged, and this continued during Q4. Year-end net debt was £52.5m, versus our £44.8m forecast. XP expects to announce a Q4 dividend of at least 32p (ahead of our 30p forecast). Despite the dip in demand from semiconductor production equipment customers (SPE), XP expects to generate growth in FY19, including the effect of a full year of Glassman revenues.

Estimates revised to reflect bookings and currency

After several years of strong growth, industry association SEMI is forecasting a c 8% decline in global semiconductor capex in CY19 as chip manufacturers respond to weaker memory prices. We have revised our estimates to factor in declining SPE revenues in FY19, with the remaining business forecast to grow at mid-single digits. We have also factored in the stronger dollar (from $1.32/£1 to $1.30/£1 for FY19). We have revised our working capital forecast, assuming that inventory grew faster due to slower revenues in Q4 and the impact of the stronger dollar. We reduce our normalised EPS forecasts by 4.0% for FY18e and 5.3% for FY19e.

Valuation: Semis weakness factored in

Since its peak of 3,620p at the end of July, the stock has declined nearly 40%, we believe due to concerns over weakening demand from SPE customers. XP is now trading at 11.9x revised FY19 EPS estimates, compared to 18.9x in July. 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 an FY19e P/E basis, XP is trading at c 22% discount to global power converter companies and 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.

Changes to estimates

Exhibit 1: Changes to estimates

£'m

FY18e

FY18e

y-o-y

FY19e

FY19e

y-o-y

Old

New

Change

Old

New

Change

Revenues

198.9

194.8

(2.1%)

16.8%

219.4

210.3

(4.2%)

8.0%

Gross profit

90.8

89.6

(1.3%)

15.4%

100.4

97.0

(3.4%)

8.3%

Gross margin

45.6%

46.0%

0.4%

(0.5%)

45.7%

46.1%

0.4%

0.1%

EBITDA

49.2

48.2

(2.0%)

15.7%

55.0

52.7

(4.2%)

9.2%

EBITDA margin

24.8%

24.8%

0.0%

(0.2%)

25.1%

25.1%

(0.0%)

0.3%

Normalised operating profit

43.5

42.1

(3.2%)

15.8%

49.0

45.7

(6.7%)

8.4%

Normalised operating profit margin

21.9%

21.6%

(0.3%)

(0.2%)

22.3%

21.7%

(0.6%)

0.1%

Reported operating profit

41.7

39.7

(4.8%)

22.3%

47.8

37.7

(21.1%)

(5.2%)

Reported operating margin

21.0%

20.4%

(0.6%)

0.9%

21.8%

17.9%

(3.9%)

(2.5%)

Normalised PBT

42.2

40.7

(3.5%)

12.7%

47.2

43.9

(7.0%)

8.0%

Reported PBT

40.4

38.3

(5.2%)

18.9%

46.0

35.9

(21.9%)

(6.1%)

Normalised net income

34.4

33.3

(3.3%)

16.9%

38.5

37.0

(3.8%)

11.1%

Reported net income

32.9

31.1

(5.2%)

10.0%

37.5

29.2

(22.1%)

(6.2%)

Normalised basic EPS (p)

180.4

173.1

(4.0%)

15.9%

201.5

190.8

(5.3%)

10.2%

Normalised diluted EPS (p)

177.6

170.5

(4.0%)

16.0%

198.4

187.9

(5.3%)

10.2%

Reported basic EPS (p)

172.1

161.8

(6.0%)

9.1%

196.3

150.6

(23.3%)

(6.9%)

Dividend per share (p)

82.0

84.0

2.4%

7.7%

85.0

87.0

2.4%

3.6%

Net debt/(cash)

44.8

52.5

17.2%

483.3%

32.7

45.0

37.4%

(14.3%)

Source: Edison Investment Research


Exhibit 2: 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

194.8

210.3

Cost of Sales

(49.0)

(51.5)

(51.0)

(55.1)

(67.8)

(89.2)

(105.2)

(113.3)

Gross Profit

44.9

49.6

50.1

54.6

62.0

77.6

89.6

97.0

EBITDA

 

 

23.3

26.0

27.6

29.7

33.0

41.7

48.2

52.7

Normalised operating profit

 

 

21.0

23.3

24.5

25.9

28.8

36.4

42.1

45.7

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

(0.4)

(0.6)

(2.0)

(2.5)

Exceptionals

0.0

0.0

0.0

(0.3)

(0.4)

(3.3)

(0.4)

(5.0)

Share-based payments

0.0

0.0

0.0

0.0

0.0

0.0

0.0

(0.5)

Reported operating profit

21.0

23.3

24.5

25.6

28.0

32.5

39.7

37.7

Net Interest

(0.8)

(0.4)

(0.2)

(0.2)

(0.2)

(0.3)

(1.5)

(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

40.7

43.9

Profit Before Tax (reported)

 

 

20.2

22.9

24.3

25.4

27.8

32.2

38.3

35.9

Reported tax

(4.5)

(4.5)

(4.8)

(5.5)

(6.3)

(3.6)

(6.9)

(6.5)

Profit After Tax (norm)

15.7

18.4

19.5

20.2

22.3

28.8

33.6

37.3

Profit After Tax (reported)

15.7

18.4

19.5

19.9

21.5

28.6

31.4

29.5

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

33.3

37.0

Net income (reported)

15.5

18.2

19.4

19.7

21.3

28.3

31.1

29.2

Basic average number of shares outstanding (m)

19

19

19

19

19

19

19

19

EPS - basic normalised (p)

 

 

81.7

95.8

102.1

105.3

116.2

149.4

173.1

190.8

EPS - diluted normalised (p)

 

 

81.3

95.1

101.1

104.3

115.3

147.0

170.5

187.9

EPS - basic reported (p)

 

 

81.7

95.8

102.1

103.7

112.0

148.3

161.8

150.6

Dividend (p)

50

55

61

66

71

78

84

87

Revenue growth (%)

(9.4)

7.7

0.0

8.5

18.3

28.5

16.8

8.0

Gross Margin (%)

47.8

49.1

49.6

49.8

47.8

46.5

46.0

46.1

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

21.6

21.7

BALANCE SHEET

Fixed Assets

 

 

52.8

53.3

56.1

65.4

73.2

88.1

126.2

132.4

Intangible Assets

38.1

39.1

40.5

48.2

53.0

63.9

91.6

91.3

Tangible Assets

13.2

12.7

14.4

16.1

19.1

22.5

32.9

39.4

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

96.7

100.5

Stocks

19.8

20.4

25.2

28.7

32.2

37.8

53.3

52.8

Debtors

14.2

15.4

16.0

17.5

21.5

23.8

29.9

31.7

Cash & cash equivalents

4.1

5.0

3.8

4.9

9.2

15.0

9.5

12.0

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)

(27.8)

(29.6)

Creditors

(11.1)

(12.7)

(14.4)

(14.6)

(16.1)

(21.4)

(24.1)

(25.9)

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)

(67.6)

(62.6)

Long term borrowings

(7.4)

0.0

0.0

(4.6)

0.0

(24.0)

(62.0)

(57.0)

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

127.6

140.8

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

126.5

139.5

CASH FLOW

Op Cash Flow before WC and tax

23.3

26.0

27.6

29.7

33.0

41.7

48.2

52.7

Working capital

4.2

(0.3)

(4.1)

(4.6)

(6.1)

0.4

(18.9)

0.6

Exceptional & other

0.4

(0.5)

1.9

0.6

5.1

(6.3)

(0.4)

(5.0)

Tax

(4.3)

(5.0)

(3.6)

(4.7)

(4.1)

(6.1)

(4.0)

(6.5)

Net operating cash flow

 

 

23.6

20.2

21.8

21.0

27.9

29.7

24.9

41.8

Capex

(4.7)

(3.2)

(5.8)

(5.4)

(6.8)

(10.1)

(15.5)

(15.7)

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)

(1.5)

(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)

(16.8)

Other

0.5

0.2

0.1

0.2

0.0

0.0

(0.4)

0.0

Net Cash Flow

7.7

7.0

4.9

(4.8)

8.1

(13.3)

(43.5)

7.5

Opening net debt/(cash)

 

 

18.6

10.6

3.5

(1.3)

3.7

(3.7)

9.0

52.5

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

52.5

45.0

Source: Company accounts, Edison Investment Research

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This report has been commissioned by XP Power and prepared and issued by Edison, in consideration of a fee payable by XP Power. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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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

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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