XP Power — Temporary supply issues cause Q4 shortfall

XP Power (LSE: XPP)

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Research: TMT

XP Power — Temporary supply issues cause Q4 shortfall

In the process of upgrading its group-wide ERP system, XP Power suffered some short-term disruptions to shipments from mid-October to mid-November. While shipments have returned to normal levels, the company expects a revenue shortfall of c £6m for FY19, with a consequent impact on earnings. We have revised our FY19 forecasts resulting in a 10.7% reduction in our normalised EPS forecast. As order intake has been robust so far this quarter, we maintain our FY20 estimates.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

XP Power

Temporary supply issues cause Q4 shortfall

Trading update

Tech hardware & equipment

11 December 2019

Price

2,920p

Market cap

£558m

$1.32/£

Net debt (£m) at end H119

50.0

Shares in issue

19.1m

Free float

90%

Code

XPP

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.4

22.7

27.0

Rel (local)

2.6

22.3

16.4

52-week high/low

2,940p

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

FY19 trading update

13 January 2020

Analyst

Katherine Thompson

+44 (0)20 3077 5730

XP Power is a research client of Edison Investment Research Limited

In the process of upgrading its group-wide ERP system, XP Power suffered some short-term disruptions to shipments from mid-October to mid-November. While shipments have returned to normal levels, the company expects a revenue shortfall of c £6m for FY19, with a consequent impact on earnings. We have revised our FY19 forecasts resulting in a 10.7% reduction in our normalised EPS forecast. As order intake has been robust so far this quarter, we maintain our FY20 estimates.

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

19.9

2.7

12/18

195.1

41.2

172.8

85.0

16.9

2.9

12/19e

194.8

32.9

137.3

88.0

21.3

3.0

12/20e

209.0

39.9

166.8

92.0

17.5

3.2

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

Software upgrade disrupts Q4 shipments

XP has highlighted previously that it was upgrading its SAP ERP system across its entire global supply chain. During system migration in mid-October, XP experienced disruption to the implementation that led to shipments temporarily falling behind expected run rates. While this was resolved and shipping run rates improved to normal or higher than normal levels from mid-November, this was not enough to compensate for the earlier shortfall. Management expects a revenue shortfall for Q419/FY19 of c £6m, which it believes it can recover in Q120. Despite these supply issues, demand has been robust over the first two months of Q4, with orders 20% ahead of the same period a year ago and improvement across all sectors.

Revising FY19 estimates; FY20 unchanged

We have reduced our estimates for FY19, with a 2.5% revenue cut leading to a 10.6% reduction in normalised PBT to £32.9m and a 10.7% cut to normalised diluted EPS. We leave our FY20 forecasts unchanged – while it is possible that the company may make up the £6m revenue shortfall in Q120, we note that sterling has strengthened against the dollar in recent months, which could offset this gain.

Valuation: Positive FY20 view outweighs Q4 shortfall

The stock is up 36% year to date and 19% since the October trading update, and even closed up after yesterday’s update. The stock has partially reduced the discount versus UK electronics peers and is trading at a small discount on a P/E basis in FY19e and FY20e. It continues to trade at a larger discount to international power converter peers – while XP has seen a margin decline in FY19 resulting from a variety of factors, peers have seen a larger decline in profitability over the same period. XP has taken steps to mitigate the impact of trade tariffs between China and the US as well as preparing for Brexit; evidence that margins are benefiting from this self-help should support upside to the stock. A return to order growth from the semiconductor equipment sector would be a further trigger for upside.

Exhibit 1: 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

194.8

209.0

Cost of Sales

(49.0)

(51.5)

(51.0)

(55.1)

(67.8)

(89.2)

(102.8)

(108.3)

(114.1)

Gross Profit

44.9

49.6

50.1

54.6

62.0

77.6

92.3

86.5

94.9

EBITDA

 

 

23.3

26.0

27.6

29.7

33.0

41.7

49.2

45.1

52.5

Normalised operating profit

 

 

21.0

23.3

24.5

25.9

28.8

36.4

42.9

36.1

42.9

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

(0.4)

(0.6)

(2.8)

(3.2)

(3.2)

Exceptionals

0.0

0.0

0.0

(0.3)

(0.4)

(3.3)

(0.8)

(2.6)

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

29.8

39.2

Net Interest

(0.8)

(0.4)

(0.2)

(0.2)

(0.2)

(0.3)

(1.7)

(3.2)

(3.0)

Joint ventures & associates (post tax)

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

32.9

39.9

Profit Before Tax (reported)

 

 

20.2

22.9

24.3

25.4

27.8

32.2

37.6

26.6

36.2

Reported tax

(4.5)

(4.5)

(4.8)

(5.5)

(6.3)

(3.6)

(7.2)

(4.8)

(6.5)

Profit After Tax (norm)

15.7

18.4

19.5

20.2

22.3

28.8

33.9

27.0

32.7

Profit After Tax (reported)

15.7

18.4

19.5

19.9

21.5

28.6

30.4

21.8

29.7

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

26.7

32.5

Net income (reported)

15.5

18.2

19.4

19.7

21.3

28.3

30.2

21.6

29.4

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

139.9

170.0

EPS - diluted normalised (p)

 

 

81.3

95.1

101.1

104.3

115.3

147.0

172.8

137.3

166.8

EPS - basic reported (p)

 

 

81.7

95.8

102.1

103.7

112.0

148.3

157.8

112.9

154.1

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

(-0.2)

7.3

Gross Margin (%)

47.8

49.1

49.6

49.8

47.8

46.5

47.3

44.4

45.4

EBITDA Margin (%)

24.8

25.7

27.3

27.0

25.4

25.0

25.2

23.2

25.1

Normalised Operating Margin

22.4

23.0

24.2

23.6

22.2

21.8

22.0

18.5

20.5

BALANCE SHEET

Fixed Assets

 

 

52.8

53.3

56.1

65.4

73.2

88.1

129.2

141.7

144.9

Intangible Assets

38.1

39.1

40.5

48.2

53.0

63.9

97.7

103.3

105.1

Tangible Assets

13.2

12.7

14.4

16.1

19.1

22.5

30.7

37.6

39.0

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

101.6

107.3

Stocks

19.8

20.4

25.2

28.7

32.2

37.8

56.5

56.4

56.3

Debtors

14.2

15.4

16.0

17.5

21.5

23.8

33.0

32.0

34.4

Cash & cash equivalents

4.1

5.0

3.8

4.9

9.2

15.0

11.5

9.1

12.6

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)

(30.9)

(32.0)

Creditors

(11.1)

(12.7)

(14.4)

(14.6)

(16.1)

(21.4)

(22.4)

(24.6)

(25.7)

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

(1.9)

(1.9)

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)

(68.0)

(63.0)

Long term borrowings

(7.4)

0.0

0.0

(4.6)

0.0

(24.0)

(63.5)

(61.4)

(56.4)

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

144.3

157.1

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

143.2

156.0

CASH FLOW

Op Cash Flow before WC and tax

23.3

26.0

27.6

29.7

33.0

41.7

49.2

45.1

52.5

Working capital

4.2

(0.3)

(4.1)

(4.6)

(6.1)

0.4

(21.6)

3.3

(1.1)

Exceptional & other

0.4

(0.5)

1.9

0.6

5.1

(6.3)

3.2

(2.6)

0.0

Tax

(4.3)

(5.0)

(3.6)

(4.7)

(4.1)

(6.1)

(4.1)

(4.8)

(6.5)

Net operating cash flow

 

 

23.6

20.2

21.8

21.0

27.9

29.7

26.7

41.0

44.8

Capex

(4.7)

(3.2)

(5.8)

(5.4)

(6.8)

(10.1)

(15.0)

(18.4)

(16.0)

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)

(3.2)

(3.0)

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)

2.6

8.5

Opening net debt/(cash)

 

 

18.6

10.6

3.5

(1.3)

3.7

(3.7)

9.0

52.0

54.2

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)

(4.8)

0.0

Closing net debt/(cash)

 

 

10.6

3.5

(1.3)

3.7

(3.7)

9.0

52.0

54.2

45.7

Source: XP Power, 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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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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

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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Research: Financials

Numis Corporation — Tough times but a positive start to FY20

Numis has continued to build its franchise against a difficult market background, with net additions to its corporate client roster during FY19 and market share gains within its equities business. Lack of corporate activity meant the return on equity was reduced to 7% last year but, on a medium-term view, there are good prospects for a substantial improvement, with a return to the five-year average of 18% not an unreasonable aspiration.

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