Strong orders support FY16 outlook

XP Power 7 October 2016 Update

XP Power

Strong orders support FY16 outlook

Trading update

Tech hardware & equipment

7 October 2016

Price

1,655p

Market cap

£314m

$1.27:£1

Net debt (£m) at end Q316

2.2

Shares in issue

19.0m

Free float

85.7%

Code

XPP

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.7)

6.8

(1.2)

Rel (local)

(4.6)

(1.9)

(10.8)

52-week high/low

1,730p

1,421p

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

FY16 trading update

13 January 2017

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

XP has seen an improving order trend through the course of Q316, with orders 44% above the Q315 intake and 9% above the record level reported in Q216 providing a strong backlog going into Q4. Management expects trading to be in line with expectations for FY16 and we leave our estimates unchanged.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/14

101.1

24.3

101.1

61.0

16.3

3.7

12/15

109.7

25.7

104.3

66.0

15.8

4.0

12/16e

127.2

27.4

107.3

69.0

15.4

4.2

12/17e

136.4

30.5

119.5

73.0

13.8

4.4

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

Q3 sees record order intake

XP saw a 13% y-o-y increase in revenues for the nine months to 30 September 2016 (+5% constant currency). This implies Q316 revenues of £32.3m (+16% y-o-y, +3% q-o-q). Nine-month order intake increased 19% y-o-y (+11% constant currency). Order intake for Q316 of £34.2m was 9% higher q-o-q and 44% higher
y-o-y, resulting in a book-to-bill for Q3 of 1.06x. Orders increased through the quarter, with the company seeing orders pulled in from Q416 and notably a pick-up in North American demand. The Brexit vote does not appear to have affected demand. XP ended Q316 with a net debt position of £2.2m, down from £6.0m at the end of H116. The company announced a Q3 dividend of 16p (in line with our forecast) to be paid on 12 January 2017 to shareholders on the register on 16 December 2016.

Outlook: estimates unchanged

The Board expects trading to be in line with expectations for FY16. We leave our estimates unchanged – we are forecasting revenue growth of 15.9% for FY16 from a combination of a full year of the EMCO acquisition and the strong dollar versus the pound. For the longer term, the company is seeing an increasing level of design wins with key customers; as customers move into production this should lead to volume orders and market share gains.

Valuation: Trading at a discount

Although the economic outlook is mixed, we believe that XP should benefit from its recent investment in engineering and sales resource, as well as acquisitions in the US and South Korea. Strong forecast cash generation should enable the company to invest in further growth, either through internal product development or through the bolt-on acquisitions it continues to evaluate. XP now trades on a P/E of 15.4x FY16e and 13.8x FY17e normalised EPS, with a forecast dividend yield of 4.2% in FY16. Competitor power converter companies are trading at around 23x FY16e EPS on EBITDA margins of c 16% versus XP’s 25% forecast EBITDA margin. The UK distributors are trading on c 20x FY16e EPS, on c 9% EBITDA margins. Based on XP’s superior margins, the company is undervalued versus peers, and is further supported by its dividend yield.

Exhibit 1: Financial summary

£'m

2012

2013

2014

2015

2016e

2017e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

93.9

101.1

101.1

109.7

127.2

136.4

Cost of Sales

(49.0)

(51.5)

(51.0)

(55.1)

(64.5)

(69.1)

Gross Profit

44.9

49.6

50.1

54.6

62.6

67.4

EBITDA

 

 

23.3

26.0

27.6

29.7

32.0

35.3

Normalised operating profit

 

 

21.0

23.3

24.5

25.9

27.7

30.8

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

(0.2)

(0.2)

Exceptionals

0.0

0.0

0.0

(0.3)

(0.1)

0.0

Share-based payments

0.0

0.0

0.0

0.0

0.0

0.0

Reported operating profit

21.0

23.3

24.5

25.6

27.4

30.6

Net Interest

(0.8)

(0.4)

(0.2)

(0.2)

(0.3)

(0.3)

Joint ventures & associates (post tax)

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

Profit Before Tax (norm)

 

 

20.2

22.9

24.3

25.7

27.4

30.5

Profit Before Tax (reported)

 

 

20.2

22.9

24.3

25.4

27.1

30.3

Reported tax

(4.5)

(4.5)

(4.8)

(5.5)

(6.5)

(7.3)

Profit After Tax (norm)

15.7

18.4

19.5

20.2

20.9

23.2

Profit After Tax (reported)

15.7

18.4

19.5

19.9

20.6

23.0

Minority interests

(0.2)

(0.2)

(0.1)

(0.2)

(0.3)

(0.3)

Discontinued operations

0.0

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

15.5

18.2

19.4

20.0

20.6

22.9

Net income (reported)

15.5

18.2

19.4

19.7

20.3

22.7

Basic average number of shares outstanding (m)

19

19

19

19

19

19

EPS - basic normalised (p)

 

 

81.67

95.84

102.12

105.28

108.39

120.80

EPS - diluted normalised (p)

 

 

81.35

95.05

101.07

104.32

107.26

119.54

EPS - basic reported (p)

 

 

81.67

95.84

102.12

103.70

106.81

119.74

Dividend (p)

50

55

61

66

69

73

Revenue growth (%)

(9.4)

7.7

0.0

8.5

15.9

7.3

Gross Margin (%)

47.8

49.1

49.6

49.8

49.2

49.4

EBITDA Margin (%)

24.8

25.7

27.3

27.0

25.1

25.9

Normalised Operating Margin

22.4

23.0

24.2

23.6

21.8

22.6

BALANCE SHEET

Fixed Assets

 

 

52.8

53.3

56.1

65.4

66.9

67.7

Intangible Assets

38.1

39.1

40.5

48.2

49.4

50.5

Tangible Assets

13.2

12.7

14.4

16.1

16.4

16.1

Investments & other

1.5

1.5

1.2

1.1

1.1

1.1

Current Assets

 

 

39.3

42.2

47.0

53.5

58.4

63.1

Stocks

19.8

20.4

25.2

28.7

32.7

35.0

Debtors

14.2

15.4

16.0

17.5

20.2

21.7

Cash & cash equivalents

4.1

5.0

3.8

4.9

3.1

4.0

Other

1.2

1.4

2.0

2.4

2.4

2.4

Current Liabilities

 

 

(20.2)

(22.4)

(18.6)

(19.8)

(23.3)

(19.5)

Creditors

(11.1)

(12.7)

(14.4)

(14.6)

(16.9)

(18.2)

Tax and social security

(1.6)

(1.1)

(1.7)

(1.2)

(1.2)

(1.2)

Short term borrowings

(7.3)

(8.5)

(2.5)

(4.0)

(5.2)

(0.1)

Other

(0.2)

(0.1)

0.0

0.0

0.0

0.0

Long Term Liabilities

 

 

(10.6)

(3.7)

(4.2)

(10.0)

(5.4)

(5.4)

Long term borrowings

(7.4)

0.0

0.0

(4.6)

0.0

0.0

Other long term liabilities

(3.2)

(3.7)

(4.2)

(5.4)

(5.4)

(5.4)

Net Assets

 

 

61.3

69.4

80.3

89.1

96.5

105.9

Minority interests

(0.2)

(0.2)

(0.1)

(0.8)

(0.9)

(1.0)

Shareholders' equity

 

 

61.1

69.2

80.2

88.3

95.6

104.9

CASH FLOW

Op Cash Flow before WC and tax

23.3

26.0

27.6

29.7

32.0

35.3

Working capital

4.2

(0.3)

(4.1)

(4.6)

(4.4)

(2.5)

Exceptional & other

0.4

(0.5)

1.9

0.6

(0.1)

0.0

Tax

(4.3)

(5.0)

(3.6)

(4.7)

(6.5)

(7.3)

Net operating cash flow

 

 

23.6

20.2

21.8

21.0

21.0

25.5

Capex

(4.7)

(3.2)

(5.8)

(5.4)

(6.0)

(5.5)

Acquisitions/disposals

(1.6)

0.1

0.1

(8.3)

0.0

0.0

Net interest

(0.5)

(0.3)

(0.1)

(0.1)

(0.3)

(0.3)

Equity financing

(0.5)

0.1

(0.2)

0.0

0.0

0.0

Dividends

(9.1)

(10.1)

(11.0)

(12.2)

(13.1)

(13.7)

Other

0.5

0.2

0.1

0.2

0.0

0.0

Net Cash Flow

7.7

7.0

4.9

(4.8)

1.6

6.0

Opening net debt/(cash)

 

 

18.6

10.6

3.5

(1.3)

3.7

2.1

FX

0.3

0.1

(0.1)

(0.2)

0.0

0.0

Other non-cash movements

0.0

0.0

0.0

0.1

0.0

0.0

Closing net debt/(cash)

 

 

10.6

3.5

(1.3)

3.7

2.1

(3.9)

Source: XP Power, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by XP Power and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by XP Power and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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