Demand outpacing supply

XP Power 14 April 2022 Update
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XP Power

Demand outpacing supply

Q122 trading update

Tech hardware & equipment

14 April 2022

Price

3475p

Market cap

£682m

$1.30:£1

Net debt (£m) at end Q122

81.5

Shares in issue

19.6m

Free float

90%

Code

XPP

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.1)

(30.6)

(31.9)

Rel (local)

(5.4)

(29.6)

(36.3)

52-week high/low

5,690p

3,330p

Business description

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

Next events

H122 trading update

July

Analyst

Katherine Thompson

+44 (0)20 3077 5730

XP Power is a research client of Edison Investment Research Limited

XP’s Q122 trading update confirms demand has remained strong across the board, with order intake up 39% y-o-y. Ongoing supply chain issues limited the amount of product that could be shipped in the quarter, with revenue up 8% y-o-y. We have revised our forecasts to take account of supply chain headwinds and the recent US legal case, reducing our normalised diluted EPS forecast by 7.1% for FY22 and 4.2% for FY23.

Year end

Revenue (£m)

PBT*
(£m)

Dil. EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/20

233.3

44.3

198.4

74

17.5

2.1

12/21

240.3

43.8

176.3

94

19.7

2.7

12/22e

260.2

47.0

189.2

94

18.4

2.7

12/23e

282.2

54.6

220.0

97

15.8

2.8

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

Strong order intake drives Q1 book-to-bill of 1.66x

XP Power reported Q122 order intake of £102.4m, up 39% y-o-y and 16% q-o-q (+37% y-o-y in constant currency). Demand has remained strong across all end markets and the order book was c £260m at the end of Q122, up from £216m at the end of FY21. Q122 revenue of £61.8m was up 8% y-o-y (7% constant currency) and 5% q-o-q. Excluding the FuG and Guth acquisitions, revenue was 1% higher y-o-y in constant currency. Shipments were affected by continued shortages of key components, logistics issues and ongoing COVID-19 effects. XP implemented phase two of its ERP upgrade in early March, which also had a modest impact on revenue. The company announced a Q1 dividend of 18p per share (flat year-on-year). XP confirmed Perak, North West Malaysia, as the location for its third Asian production facility, where it intends to break ground this year.

Forecasts reflect heavier H2 weighting

We have revised our forecasts to reflect lower product shipments in Q1; although we factor in sequential growth in revenue through the year and order backlog is at record levels, we have cut our FY22 revenue forecast by 3% and FY23 by 2% to reflect supply chain challenges. This results in EPS cuts of 7.1% in FY22 and 4.2% in FY23. We have also factored in payment of the damages award and related legal costs from the recent litigation with Comet. We forecast a net debt/EBITDA ratio of 1.8x by end FY22 (within banking covenants limit of 3x).

Valuation: Pressured by supply chain & legal issues

On a P/E basis for FY22, XP is trading in line with global power solution companies and at a discount to UK electronics companies, with a dividend yield at the upper end of the range. XP generates EBITDA and EBIT margins at the top end of both peer groups and has a record order book entering Q222. In our view, evidence that supply chain issues are abating, litigation has been resolved and FuG and Guth are being successfully integrated will be key drivers of the share price.

Outlook and changes to forecasts

Management noted that it enters Q222 with a very strong order book. While there are ongoing uncertainties regarding component supply and freight capacity and costs, management is optimistic on XP’s prospects for FY22 and is progressing its planned investment in Malaysia. Longer term, it believes the company is well positioned to grow ahead of its end markets.

The company noted that net debt at the end of Q122 was £81.5m, up from £24.6m at the end of FY21. This reflects the £32.8m paid to acquire FuG and Guth, legal fees and an increase in working capital of c £12m to meet the increased backlog. Management estimates this working capital investment will be sufficient to meet the expected revenue ramp-up through FY22. By the end of H122, the company expects net debt/EBITDA to rise to 2.0–2.3x, within the banking covenants’ maximum of 3.0x. This takes into account the damages claim and related legal costs (see below). Management expects this to reduce below 2.0x by year-end. The company noted that it has put through targeted price increases to reflect the inflationary environment.

We have revised our forecasts to reflect Q122 revenue and orders. We assume sequential growth in revenue on a quarterly basis through FY22, but from the lower base in Q1, this results in a 3.1% reduction in our FY22 revenue forecast as supply chain challenges persist. For FY23, we reduce our revenue forecast by 2.3%, equating to 8.5% growth year-on-year. This flows through to a reduction in our normalised EPS forecasts of 7.1% in FY22 and 4.2% in FY23.

In March, the company announced that in the US legal action brought by Comet Technologies USA, Comet and YXLON International (Comet) for trade secrets misappropriation, the jury found in favour of Comet and awarded damages of $40m against the company. The board is awaiting the formal judgement and is assessing its next steps. We have factored the $40m damages payment into our forecasts as an exceptional item. We also include our estimate for related legal costs of $20m.

We have reduced our FY22 and FY23 dividend forecasts, assuming FY22 dividend is flat versus FY21 (Q122 dividend of 18p per share is flat year-on-year).

Exhibit 1: Changes to forecasts

£'m

FY22e

FY22e

FY23e

FY23e

Old

New

Change

y-o-y

Old

New

Change

y-o-y

Revenues

268.6

260.2

(3.1%)

8.3%

289.0

282.2

(2.3%)

8.5%

Gross profit

124.7

120.1

(3.7%)

10.9%

135.8

132.7

(2.3%)

10.5%

Gross margin

46.4%

46.1%

(0.3%)

1.1%

47.0%

47.0%

0.0%

0.9%

EBITDA

64.5

61.5

(4.7%)

10.8%

72.0

70.2

(2.5%)

14.1%

EBITDA margin

24.0%

23.6%

(0.4%)

0.5%

24.9%

24.9%

(0.0%)

1.2%

Normalised operating profit

52.0

49.0

(5.8%)

8.6%

58.4

56.6

(3.0%)

15.5%

Normalised operating margin

19.4%

18.8%

(0.5%)

0.1%

20.2%

20.0%

(0.1%)

1.2%

Reported operating profit

47.8

(1.4)

(102.9%)

(104.6%)

55.2

53.4

(3.2%)

N/A

Reported operating margin

17.8%

(0.5%)

(18.3%)

(12.9%)

19.1%

18.9%

(0.2%)

19.4%

Normalised PBT

50.5

47.0

(7.0%)

7.3%

56.9

54.6

(4.0%)

16.2%

Reported PBT

46.3

(3.4)

(107.3%)

(111.9%)

53.7

51.4

(4.2%)

N/A

Normalised net income

40.7

37.8

(7.1%)

8.0%

45.9

44.0

(4.2%)

16.3%

Reported net income

37.3

(3.0)

(108.0%)

(113.2%)

43.3

41.4

(4.3%)

N/A

Normalised basic EPS (p)

207.3

192.5

(7.1%)

7.4%

233.6

223.9

(4.2%)

16.3%

Normalised diluted EPS (p)

203.7

189.2

(7.1%)

7.4%

229.6

220.0

(4.2%)

16.3%

Reported basic EPS (p)

190.0

(15.2)

(108.0%)

(113.1%)

220.3

210.9

(4.3%)

N/A

Dividend per share (p)

97.0

94.0

(3.1%)

0.0%

101.0

97.0

(4.0%)

3.2%

Net debt/(cash)

64.7

106.4

64.3%

332.3%

55.4

98.7

78.3%

(7.2%)

Orders

322.6

365.3

13.2%

6.4%

322.0

326.0

1.2%

(10.7%)

Net debt/EBITDA (x)

1.0

1.8

0.8

1.4

Source: Edison Investment Research

Exhibit 2: Financial summary

£'m

2015

2016

2017

2018

2019

2020

2021

2022e

2023e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

109.7

129.8

166.8

195.1

199.9

233.3

240.3

260.2

282.2

Cost of Sales

(55.1)

(67.8)

(89.2)

(102.8)

(109.8)

(123.2)

(132.0)

(140.1)

(149.5)

Gross Profit

54.6

62.0

77.6

92.3

90.1

110.1

108.3

120.1

132.7

EBITDA

 

 

29.7

33.0

41.7

49.2

44.5

56.8

55.5

61.5

70.2

Normalised operating profit

 

 

25.9

28.8

36.4

42.9

35.0

46.0

45.1

49.0

56.6

Amortisation of acquired intangibles

0.0

(0.4)

(0.6)

(2.8)

(3.2)

(3.2)

(2.8)

(3.2)

(3.2)

Exceptionals

(0.3)

(0.4)

(3.3)

(0.8)

(5.1)

(5.4)

(12.6)

(47.2)

0.0

Share-based payments

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Reported operating profit

25.6

28.0

32.5

39.3

26.7

37.4

29.7

(1.4)

53.4

Net Interest

(0.2)

(0.2)

(0.3)

(1.7)

(2.7)

(1.7)

(1.3)

(2.0)

(2.0)

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)

 

 

25.7

28.6

36.1

41.2

32.3

44.3

43.8

47.0

54.6

Profit Before Tax (reported)

 

 

25.4

27.8

32.2

37.6

24.0

35.7

28.4

(3.4)

51.4

Reported tax

(5.5)

(6.3)

(3.6)

(7.2)

(3.2)

(4.0)

(5.4)

0.6

(9.7)

Profit After Tax (norm)

20.2

22.3

28.8

33.9

27.9

39.2

35.4

38.1

44.2

Profit After Tax (reported)

19.9

21.5

28.6

30.4

20.8

31.7

23.0

(2.7)

41.7

Minority interests

(0.2)

(0.2)

(0.3)

(0.2)

(0.3)

(0.2)

(0.4)

(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)

20.0

22.1

28.5

33.7

27.6

39.0

35.0

37.8

44.0

Net income (reported)

19.7

21.3

28.3

30.2

20.5

31.5

22.6

(3.0)

41.4

Basic ave. number of shares outstanding (m)

19.0

19.0

19.1

19.1

19.2

19.3

19.5

19.6

19.6

EPS - basic normalised (p)

 

 

105.3

116.2

149.4

176.1

144.1

201.8

179.4

192.5

223.9

EPS - diluted normalised (p)

 

 

104.3

115.3

147.0

172.8

141.4

198.4

176.3

189.2

220.0

EPS - basic reported (p)

 

 

103.7

112.0

148.3

157.8

107.0

163.0

115.8

(15.2)

210.9

Dividend (p)

66

71

78

85

55

74

94

94

97

Revenue growth (%)

8.5

18.3

28.5

17.0

2.5

16.7

3.0

8.3

8.5

Gross Margin (%)

49.8

47.8

46.5

47.3

45.1

47.2

45.1

46.1

47.0

EBITDA Margin (%)

27.0

25.4

25.0

25.2

22.3

24.3

23.1

23.6

24.9

Normalised Operating Margin

23.6

22.2

21.8

22.0

17.5

19.7

18.8

18.8

20.0

BALANCE SHEET

Fixed Assets

 

 

65.4

73.2

88.1

129.2

137.4

135.2

150.5

197.1

204.8

Intangible Assets

48.2

53.0

63.9

97.7

99.6

98.8

108.8

147.0

149.8

Tangible Assets

16.1

19.1

22.5

30.7

35.9

33.5

38.5

46.9

51.8

Investments & other

1.1

1.1

1.7

0.8

1.9

2.9

3.2

3.2

3.2

Current Assets

 

 

53.5

65.7

83.5

105.1

96.0

107.0

121.7

132.5

134.2

Stocks

28.7

32.2

37.8

56.5

44.1

54.2

74.0

76.8

73.7

Debtors

17.5

21.5

23.8

33.0

34.8

30.2

30.8

37.8

44.8

Cash & cash equivalents

4.9

9.2

15.0

11.5

11.2

13.9

9.0

10.0

7.7

Other

2.4

2.8

6.9

4.1

5.9

8.7

7.9

7.9

7.9

Current Liabilities

 

 

(19.8)

(25.8)

(25.1)

(26.8)

(30.4)

(34.7)

(49.0)

(45.1)

(42.1)

Creditors

(14.6)

(16.1)

(21.4)

(22.4)

(25.2)

(28.3)

(44.7)

(40.8)

(37.8)

Tax and social security

(1.2)

(3.3)

(3.5)

(4.2)

(3.1)

(4.9)

(2.5)

(2.5)

(2.5)

Short term borrowings

(4.0)

(5.5)

0.0

0.0

(1.6)

(1.5)

(1.8)

(1.8)

(1.8)

Other

0.0

(0.9)

(0.2)

(0.2)

(0.5)

0.0

0.0

0.0

0.0

Long Term Liabilities

 

 

(10.0)

(6.2)

(29.6)

(70.1)

(64.1)

(43.0)

(50.8)

(133.4)

(123.2)

Long term borrowings

(4.6)

0.0

(24.0)

(63.5)

(57.3)

(35.2)

(39.9)

(122.5)

(112.3)

Other long term liabilities

(5.4)

(6.2)

(5.6)

(6.6)

(6.8)

(7.8)

(10.9)

(10.9)

(10.9)

Net Assets

 

 

89.1

106.9

116.9

137.4

138.9

164.5

172.4

151.0

173.6

Minority interests

(0.8)

(0.8)

(0.9)

(1.0)

(0.7)

(0.7)

(0.9)

(1.0)

(1.0)

Shareholders' equity

 

 

88.3

106.1

116.0

136.4

138.2

163.8

171.5

150.1

172.6

CASH FLOW

Op Cash Flow before WC and tax

29.7

33.0

41.7

49.2

44.5

56.8

55.5

61.5

70.2

Working capital

(4.6)

(6.1)

0.4

(21.6)

10.6

(6.2)

(4.0)

(13.6)

(7.1)

Exceptional & other

0.6

5.1

(6.3)

3.2

(4.4)

(1.7)

(10.9)

(47.2)

0.0

Tax

(4.7)

(4.1)

(6.1)

(4.1)

(4.5)

(3.3)

(4.2)

0.6

(9.7)

Net operating cash flow

 

 

21.0

27.9

29.7

26.7

46.2

45.6

36.4

1.3

53.4

Capex

(5.4)

(6.8)

(10.1)

(15.0)

(16.3)

(14.9)

(21.9)

(28.0)

(23.0)

Acquisitions/disposals

(8.3)

0.1

(18.3)

(35.4)

0.0

(0.5)

0.0

(32.8)

0.0

Net interest

(0.1)

(0.2)

(0.2)

(1.5)

(2.7)

(1.3)

(0.9)

(2.0)

(2.0)

Equity financing

0.0

0.2

(0.2)

0.6

0.5

3.5

0.6

0.0

0.0

Dividends

(12.2)

(13.1)

(14.2)

(15.6)

(17.2)

(7.3)

(18.4)

(18.6)

(19.0)

Other

0.2

0.0

0.0

0.0

(1.5)

(1.7)

(1.7)

(1.7)

(1.7)

Net Cash Flow

(4.8)

8.1

(13.3)

(40.2)

9.0

23.4

(5.9)

(81.8)

7.6

Opening net debt/(cash)

 

 

(1.3)

3.7

(3.7)

9.0

52.0

41.3

17.9

24.6

106.4

FX

(0.2)

(0.5)

0.6

(2.7)

1.7

0.0

(0.8)

0.0

0.0

Other non-cash movements

0.1

(0.2)

0.0

(0.1)

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

3.7

(3.7)

9.0

52.0

41.3

17.9

24.6

106.4

98.7

Source: XP Power, Edison Investment Research

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Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 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

1185 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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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 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

1185 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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