Expanding into high-voltage products

XP Power 26 November 2015 Update

XP Power

Expanding into high-voltage products

Acquisition

Tech hardware & equipment

26 November 2015

Price

1470p

Market cap

£279m

$1.52/£1

Net cash (£m) at end Q315

1.2

Shares in issue

19.0m

Free float

85.6%

Code

XPP

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.0)

(6.4)

6.8

Rel (local)

(0.5)

(9.8)

10.5

52-week high/low

1733p

1375p

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 event

FY15 trading update

8 January 2016

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

With the acquisition of EMCO for £7.8m, XP is expanding its product range to encompass high-voltage products. EMCO brings new verticals and new customers to the group, and should benefit from access to XP’s sales channels. The company expects the deal to be earnings accretive in FY16 – we upgrade our FY15e EPS by 0.2% and FY16e EPS by 1.4%.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/13

101.1

22.9

95.1

55.0

15.5

3.7

12/14

101.1

24.3

101.1

61.0

14.5

4.1

12/15e

108.5

25.0

97.9

64.0

15.0

4.4

12/16e

117.8

26.8

105.2

65.0

14.0

4.4

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

Expanding the product range

XP has acquired EMCO High Voltage Corporation (EMCO), a privately owned designer and manufacturer of high-voltage power modules, with a specialism in low-power designs. EMCO is based in California and has manufacturing operations in Nevada. With its focus on standard and modified standard products, EMCO’s business model is a good fit with XP. There is no overlap with XP’s product range, although the two companies do have some customers in common.

Cash-based deal; earnings accretive

XP has paid $12m/£7.8m in cash, on a debt-free/cash-free basis, funded by a new $12m term loan. EMCO reported revenues of $7.9m/£5.1m in 2014. We have factored in conservative assumptions for EMCO, assuming revenues of $8m in FY16 at a 10% operating margin, making no assumptions at this point for revenue or cost synergies. We have upgraded our revenue forecasts by 0.4% in FY15 and 4.6% in FY16, and upgraded normalised EPS by 0.2% in FY15 and 1.4% in FY16. We forecast that XP will return to a net cash position by the end of FY16. We believe there is scope to leverage XP’s existing salesforce and customer base, which could accelerate volumes and enhance gross margins.

Valuation: Positive US order momentum the trigger

XP is trading on a P/E of 15.0x FY15e and 14.0x FY16e EPS, with a forecast dividend yield of more than 4% in FY15/16. While the company trades at a discount to peers (power converter companies trade at c 19x FY15e EPS on average EBITDA margins of 18%; UK distributors trade at c 14x FY15e EPS, on average 9% EBITDA margins), an improving order environment in the US will be key to upside in the short term. In the medium term, successful integration of and cross-selling arising from the two recent acquisitions could provide further upside to estimates. XP generates strong cash flows that should support further investment in growth, either through internal product development or bolt-on acquisitions.

Exhibit 1: Financial summary

£m

2011

2012

2013

2014

2015e

2016e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

103.6

93.9

101.1

101.1

108.5

117.8

Cost of Sales

(52.7)

(49.0)

(51.5)

(51.0)

(54.6)

(58.7)

Gross Profit

50.9

44.9

49.6

50.1

53.8

59.1

EBITDA

 

 

27.5

23.3

26.0

27.6

28.9

31.1

Operating Profit (before am. acq. Intang & except.)

25.3

21.0

23.3

24.5

25.1

27.1

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

0.0

0.0

Operating Profit

25.3

21.0

23.3

24.5

25.1

27.1

Net Interest

(1.0)

(0.8)

(0.4)

(0.2)

(0.2)

(0.3)

Profit Before Tax (norm)

 

 

24.3

20.2

22.9

24.3

25.0

26.8

Profit Before Tax (FRS 3)

 

 

24.3

20.2

22.9

24.3

25.0

26.8

Tax

(3.6)

(4.5)

(4.5)

(4.8)

(6.0)

(6.4)

Profit After Tax (norm)

20.7

15.7

18.4

19.5

19.0

20.4

Profit After Tax (FRS 3)

20.7

15.7

18.4

19.5

19.0

20.4

Average Number of Shares Outstanding (m)

18.9

19.0

19.0

19.0

19.0

19.0

EPS - normalised (p)

 

 

107.1

81.7

95.8

102.1

98.9

106.3

EPS - normalised fully diluted (p)

 

 

106.4

81.3

95.1

101.1

97.9

105.2

EPS - FRS 3 (p)

 

 

107.1

81.7

95.8

102.1

98.9

106.3

Dividend per share (p)

45.0

50.0

55.0

61.0

64.0

65.0

Gross Margin (%)

49.1

47.8

49.1

49.6

49.6

50.2

EBITDA Margin (%)

26.5

24.8

25.7

27.3

26.6

26.4

Operating Margin (before GW and except.) (%)

24.4

22.4

23.0

24.2

23.2

23.0

BALANCE SHEET

Fixed Assets

 

 

52.7

52.8

53.3

56.1

65.0

65.9

Intangible Assets

37.7

38.1

39.1

40.5

49.2

50.0

Tangible Assets

12.9

13.2

12.7

14.4

14.6

14.7

Investment in associates

2.1

1.5

1.5

1.2

1.2

1.2

Current Assets

 

 

46.9

39.3

42.2

47.0

51.3

56.2

Stocks

22.0

19.8

20.4

25.2

26.7

28.4

Debtors

16.0

14.2

15.4

16.0

17.2

18.6

Cash

6.3

4.1

5.0

3.8

5.4

7.2

Other

2.6

1.2

1.4

2.0

2.0

2.0

Current Liabilities

 

 

(28.2)

(20.2)

(22.4)

(18.6)

(21.2)

(23.6)

Creditors

(14.8)

(12.9)

(13.9)

(16.1)

(16.4)

(17.6)

Short term borrowings

(13.4)

(7.3)

(8.5)

(2.5)

(4.8)

(6.0)

Long Term Liabilities

 

 

(15.6)

(10.6)

(3.7)

(4.2)

(8.7)

(4.2)

Long term borrowings

(11.5)

(7.4)

0.0

0.0

(4.5)

0.0

Other long term liabilities

(4.1)

(3.2)

(3.7)

(4.2)

(4.2)

(4.2)

Net Assets

 

 

55.8

61.3

69.4

80.3

86.4

94.3

CASH FLOW

Operating Cash Flow

 

 

21.2

27.9

25.2

25.4

26.4

29.2

Net Interest

(0.8)

(0.5)

(0.3)

(0.1)

(0.2)

(0.3)

Tax

(5.0)

(4.3)

(5.0)

(3.6)

(6.0)

(6.4)

Capex

(7.7)

(4.7)

(3.2)

(5.8)

(4.9)

(4.9)

Acquisitions/disposals

(0.1)

(1.6)

0.1

0.1

(8.4)

0.0

Financing

(0.8)

(0.5)

0.1

(0.2)

0.0

0.0

Dividends

(7.8)

(9.1)

(10.1)

(11.0)

(12.2)

(12.5)

Other

0.8

0.5

0.2

0.1

0.0

0.0

Net Cash Flow

(0.2)

7.7

7.0

4.9

(5.2)

5.1

Opening net debt/(cash)

 

 

18.4

18.6

10.6

3.5

(1.3)

3.9

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

0.0

Other

(0.0)

0.3

0.1

(0.1)

0.0

0.0

Closing net debt/(cash)

 

 

18.6

10.6

3.5

(1.3)

3.9

(1.2)

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

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NSW 2000, Australia

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Level 15, 171 Featherston St

Wellington 6011

New Zealand

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