XP Power — Rounding out the portfolio

TMT

XP Power

Rounding out the portfolio

Acquisition

Tech hardware & equipment

10 May 2018

Price	3,480p
Market cap	£668m
$1.4:£1
Net debt (£m) at end FY17		9.0

Shares in issue	19.2m
Free float	90%
Code	XPP

Primary exchange	LSE
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	7.6	11.3	34.5
Rel (local)	2.1	5.3	29.5

52-week high/low

3,740p

2,390p

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

Q118 trading update

13 April 2018

Analysts

Katherine Thompson	+44 (0)20 3077 5730
Dan Ridsdale	+44 (0)20 3077 5729

tech@edisongroup.com

Edison profile page

XP Power is a research client of Edison Investment Research Limited

With the acquisition of Glassman High Voltage, XP continues in its quest to expand its product portfolio to include high-voltage and high-power products. The acquisition should help XP to further penetrate key accounts, as well as adding new customers. XP is paying £31.8m in cash, funded by extending the company’s credit facility, and expects the deal to be earnings enhancing in FY18. We increase our FY18 and FY19 normalised EPS forecasts by 3.6% and 6.1% respectively. We forecast a net debt/EBITDA ratio of 0.8x at end FY18, well below the company’s 2.0x ceiling.

Year end	Revenue (£m)	PBT* (£m)	EPS* (p)	DPS (p)	P/E (x)	Yield (%)
12/16	129.8	28.6	115.3	71.0	30.2	2.0
12/17	166.8	36.1	147.0	78.0	23.7	2.2
12/18e	193.9	41.7	177.2	82.0	19.6	2.4
12/19e	209.4	45.6	193.7	85.0	18.0	2.4

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

Extending the product portfolio

XP Power has agreed to acquire Glassman High Voltage, a US-based designer and manufacturer of high-voltage, high-power conversion products. This extends XP’s product portfolio to include products that supply both high-power and high-voltage, complementing EMCO’s high-voltage, low-power products and Comdel’s RF power products. With limited sales capability of its own, Glassman products will be marketed by XP’s salesforce. While Glassman has some customers in common with XP, there is no overlap in terms of products sold to those customers, and it brings several new customers to the group.

Accretive in FY18

Glassman generated revenues of $17.3m and PBT of $2.9m in 2017 (16% margin). We have factored in pro-rated revenues at a growth rate of 10% in FY18, reflecting the exposure to the semiconductor manufacturing market, and 5% in FY19. This results in a revenue uplift of 4.3% in FY18e and 7.3% in FY19e, and an increase in our normalised EPS forecasts of 3.6% in FY18 and 6.1% in FY19. We forecast that the company will close FY18 with a net debt position of £38.3m.

Valuation: Reflects consistently profitable growth

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. We see scope for upgrades to earnings estimates from cross-selling and further market share gains in healthcare. The company is well funded to make further acquisitions, while maintaining its strong operating profitability.

Background to the deal

XP has agreed to pay $44.5m/£31.8m in cash to acquire the business and assets of Glassman High Voltage Inc (Glassman) – completion is expected by the end of May. Glassman was founded in 1977 by Sanford Glassman, the major shareholder, and is based in New Jersey, US. The company designs and supplies a range of standard, modified and custom high-voltage, high-power conversion products. Typically, its products are used in equipment involved in the ionisation and acceleration of particles – applications include semiconductor production equipment, vacuum/plasma processing, analytical instrumentation, medical diagnostic and test equipment. Glassman has a very comprehensive standard product portfolio and can also provide custom solutions. It has a manufacturing facility in New Jersey. The acquisition includes Glassman’s European sales operations, which are based in Hampshire, UK.

Sandy Glassman recently passed away; consequently Glassman is being acquired from his estate. On completion, the current President, Karolee Glassman, will leave and the general manager of the business, John Belden, will remain with the business and run Glassman within XP.

Financial profile

In 2017, Glassman generated revenues in the US of $17.3m/£12.4m and PBT of $2.9m/£2.0m (16.1% margin). This compares to a PBT margin of 21.6% for XP in FY17. The acquisition cost of $45m/£31.8m is on a debt- and cash-free basis. XP is extending its credit facility by $45m to fund the deal. This values the business on a trailing EV/Sales multiple of 2.6x compared to XP’s trailing multiple of 4.0x, and a trailing PBT multiple of 15.3x vs 18.7x for XP.

Changes to forecasts

We have revised our forecasts to reflect a revenue contribution of $11.1m in FY18 and $18.2m in FY19. We expect a reduction in the Glassman cost base due to the absence of founder-related expenses, which should bring EBITDA margins in line with the 25% group margin. We forecast that the net debt/EBITDA ratio will increase to 0.8x by the end of FY18, reducing to 0.5x by end FY19.

Exhibit 1: Changes to forecasts

£'m	FY18e	FY18e		y-o-y	FY19e	FY19e		y-o-y
£'m	Old	New	Change		Old	New	Change
Revenues	186.0	193.9	4.3%	16.3%	195.1	209.4	7.3%	8.0%
Gross profit	86.0	89.8	4.4%	15.7%	90.2	97.1	7.6%	8.1%
Gross margin	46.2%	46.3%	0.1%	(0.2%)	46.2%	46.3%	0.1%	0.1%
EBITDA	46.6	48.5	4.3%	16.4%	49.5	53.1	7.2%	9.4%
EBITDA margin	25.0%	25.0%	(0.0%)	0.0%	25.4%	25.4%	(0.0%)	0.3%
Normalised operating profit	40.9	42.8	4.9%	17.7%	43.5	47.1	8.2%	10.0%
Normalised operating profit margin	22.0%	22.1%	0.1%	0.3%	22.3%	22.5%	0.2%	0.4%
Reported operating profit	39.5	41.4	5.0%	27.5%	42.3	45.9	8.4%	10.8%
Reported operating margin	21.2%	21.4%	0.2%	1.9%	21.7%	21.9%	0.2%	0.6%
Normalised PBT	40.3	41.7	3.5%	15.4%	42.9	45.6	6.1%	9.3%
Reported PBT	38.9	40.3	3.7%	25.1%	41.7	44.4	6.2%	10.1%
Normalised net income	33.2	34.4	3.6%	20.6%	35.4	37.6	6.1%	9.3%
Reported net income	32.0	33.2	3.7%	17.2%	34.4	36.6	6.3%	10.2%
Normalised basic EPS (p)	173.8	180.0	3.6%	20.5%	185.4	196.7	6.1%	9.3%
Normalised diluted EPS (p)	171.1	177.2	3.6%	20.5%	182.5	193.7	6.1%	9.3%
Reported basic EPS (p)	167.6	173.8	3.7%	17.2%	180.2	191.5	6.3%	10.2%
Dividend per share (p)	82.0	82.0	0.0%	5.1%	85.0	85.0	0.0%	3.7%
Net debt/(cash)	5.7	38.3	570.4%	325.9%	(6.2)	25.8	(515.2%)	(32.6%)

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	193.9	209.4
Cost of Sales		(49.0)	(51.5)	(51.0)	(55.1)	(67.8)	(89.2)	(104.2)	(112.4)
Gross Profit		44.9	49.6	50.1	54.6	62.0	77.6	89.8	97.1
EBITDA		23.3	26.0	27.6	29.7	33.0	41.7	48.5	53.1
Normalised operating profit		21.0	23.3	24.5	25.9	28.8	36.4	42.8	47.1
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)	0.0	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	41.4	45.9
Net Interest		(0.8)	(0.4)	(0.2)	(0.2)	(0.2)	(0.3)	(1.2)	(1.6)
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	41.7	45.6
Profit Before Tax (reported)		20.2	22.9	24.3	25.4	27.8	32.2	40.3	44.4
Reported tax		(4.5)	(4.5)	(4.8)	(5.5)	(6.3)	(3.6)	(6.8)	(7.5)
Profit After Tax (norm)		15.7	18.4	19.5	20.2	22.3	28.8	34.6	37.8
Profit After Tax (reported)		15.7	18.4	19.5	19.9	21.5	28.6	33.4	36.8
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	37.6
Net income (reported)		15.5	18.2	19.4	19.7	21.3	28.3	33.2	36.6

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	179.96	196.75
EPS - diluted normalised (p)		81.35	95.05	101.07	104.32	115.33	147.00	177.18	193.70
EPS - basic reported (p)		81.67	95.84	102.12	103.70	112.02	148.31	173.78	191.51
Dividend (p)		50	55	61	66	71	78	82	85

Revenue growth (%)		(9.4)	7.7	0.0	8.5	18.3	28.5	16.3	8.0
Gross Margin (%)		47.8	49.1	49.6	49.8	47.8	46.5	46.3	46.3
EBITDA Margin (%)		24.8	25.7	27.3	27.0	25.4	25.0	25.0	25.4
Normalised Operating Margin		22.4	23.0	24.2	23.6	22.2	21.8	22.1	22.5

BALANCE SHEET
Fixed Assets		52.8	53.3	56.1	65.4	73.2	88.1	128.3	132.3
Intangible Assets		38.1	39.1	40.5	48.2	53.0	63.9	97.0	98.5
Tangible Assets		13.2	12.7	14.4	16.1	19.1	22.5	29.6	32.1
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	96.6	110.0
Stocks		19.8	20.4	25.2	28.7	32.2	37.8	45.7	49.3
Debtors		14.2	15.4	16.0	17.5	21.5	23.8	29.2	31.6
Cash & cash equivalents		4.1	5.0	3.8	4.9	9.2	15.0	17.7	25.2
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)	(28.4)	(30.2)
Creditors		(11.1)	(12.7)	(14.4)	(14.6)	(16.1)	(21.4)	(24.7)	(26.5)
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	134.8	155.4
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	133.8	154.3

CASH FLOW
Op Cash Flow before WC and tax		23.3	26.0	27.6	29.7	33.0	41.7	48.5	53.1
Working capital		4.2	(0.3)	(4.1)	(4.6)	(6.1)	0.4	(10.0)	(4.1)
Exceptional & other		0.4	(0.5)	1.9	0.6	5.1	(6.3)	0.0	0.0
Tax		(4.3)	(5.0)	(3.6)	(4.7)	(4.1)	(6.1)	(3.9)	(7.5)
Net operating cash flow		23.6	20.2	21.8	21.0	27.9	29.7	34.6	41.5
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)	(31.8)	0.0
Net interest		(0.5)	(0.3)	(0.1)	(0.1)	(0.2)	(0.2)	(1.2)	(1.6)
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)	(29.3)	12.5
Opening net debt/(cash)		18.6	10.6	3.5	(1.3)	3.7	(3.7)	9.0	38.3
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	38.3	25.8

Source: <Insert Source or Notes>

Source: XP Power, Edison Investment Research

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New York +1 646 653 7026

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Level 4, Office 1205

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Frankfurt +49 (0)69 78 8076 960

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London +44 (0)20 3077 5700

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London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

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Frankfurt +49 (0)69 78 8076 960

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