XP Power — Expecting better market conditions in 2024

XP Power (LSE: XPP)

Last close As at 18/05/2024

GBP11.28

−2.00 (−0.18%)

Market capitalisation

GBP268m

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Research: TMT

XP Power — Expecting better market conditions in 2024

XP Power closed FY23 with higher-than-expected revenue, benefiting from the delay to relocation of its California facility, which pulled shipments worth c £5m into Q423 and pushed c £12m capex into Q124. Q423 order intake was higher than we forecast, with upside from semiconductor equipment customers partially offset by weaker demand from healthcare and industrial customers. Timing issues and currency resulted in lower-than-expected gearing at end-FY23, although it is expected to rise in H124 before reducing again in H224. Management expects market conditions to improve through 2024, with results weighted to H2. We maintain our forecasts pending FY23 results in March.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

XP Power

Expecting better market conditions in 2024

FY23 trading update

Electronic and electrical equipment

11 January 2024

Price

1,290p

Market cap

£305m

$1.27:£1

Net debt (£m) at end FY23

112.6

Shares in issue

23.7m

Free float

95.4%

Code

XPP

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

7.9

32.9

(40.3)

Rel (local)

6.2

31.1

(39.9)

52-week high/low

2,680p

776p

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

FY23 results

March

Analyst

Katherine Thompson

+44 (0)20 3077 5700

XP Power is a research client of Edison Investment Research Limited

XP Power closed FY23 with higher-than-expected revenue, benefiting from the delay to relocation of its California facility, which pulled shipments worth c £5m into Q423 and pushed c £12m capex into Q124. Q423 order intake was higher than we forecast, with upside from semiconductor equipment customers partially offset by weaker demand from healthcare and industrial customers. Timing issues and currency resulted in lower-than-expected gearing at end-FY23, although it is expected to rise in H124 before reducing again in H224. Management expects market conditions to improve through 2024, with results weighted to H2. We maintain our forecasts pending FY23 results in March.

Year end

Revenue

(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/21

240.3

43.8

176.3

94

7.3

7.3

12/22

290.4

38.0

160.1

94

8.1

7.3

12/23e

309.8

28.3

111.2

18

11.6

1.4

12/24e

307.5

28.2

94.1

0

13.7

N/A

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

Q423/FY23 revenue ahead due to delayed relocation

XP expects to report Q423 revenue of £81.2m (-7% y-o-y, -5% constant currency (cc)) and FY23 revenue of £316.5m (+9% y-o-y, +8% cc). This is c £6.5m ahead of our forecasts, mainly due to the decision to delay the relocation of the California facility from December 2023 to January 2024. The resulting £5m of shipments brought into Q423 will reduce the level of shipments in early Q124. Q423 order intake of £49.1m was 7% ahead of our forecast, resulting in a Q4 book-to-bill ratio of 0.6x. The company noted that semiconductor equipment customers placed orders for high-voltage products, while demand from healthcare and industrial customers was a little weaker. The order book was c £192m at the end of FY23, down from £225m at the end of Q323. Actions taken to reduce costs and borrowings are on track and delivering the expected benefits.

Net debt helped by delay to relocation and currency

Year-end net debt of £112.6m was 21% lower than our £142.2m forecast, mainly due to the combination of a £12m pushout of capex for the US relocation into Q124 and the stronger pound versus the dollar reducing the reported value of dollar-denominated debt. While FY23 profitability has not yet been finalised, the company estimates that year-end net debt/adj. EBITDA was c 2x, substantially lower than our 2.6x forecast, although we believe the majority of this is timing related.

Valuation: Bookings growth the next trigger

The stock is up c 66% from its low in October 2023. On an FY24 P/E basis, XP is trading at a c 40% discount to global power solution companies and c 10% discount to UK electronics companies, with EBIT margins at the upper end of both peer groups. Our 10-year discounted cash flow with conservative growth assumptions values the company at 1,987p, 54% above the current share price.

Exhibit 1: Financial summary

£'m

2018

2019

2020

2021

2022

2023e

2024e

2025e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

195.1

199.9

233.3

240.3

290.4

309.8

307.5

319.2

Cost of Sales

(102.8)

(109.8)

(123.2)

(132.0)

(169.8)

(180.5)

(179.0)

(185.2)

Gross Profit

92.3

90.1

110.1

108.3

120.6

129.4

128.4

133.9

EBITDA

 

 

49.2

44.5

56.8

55.5

56.4

58.3

59.7

63.9

Normalised operating profit

 

 

42.9

35.0

46.0

45.1

42.9

42.3

42.2

45.7

Amortisation of acquired intangibles

(2.8)

(3.2)

(3.2)

(2.8)

(4.1)

(3.5)

(3.5)

(3.5)

Exceptionals

(0.8)

(5.1)

(5.4)

(12.6)

(62.9)

(7.0)

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

39.3

26.7

37.4

29.7

(24.1)

31.8

38.7

42.2

Net Interest

(1.7)

(2.7)

(1.7)

(1.3)

(4.9)

(14.0)

(14.0)

(13.0)

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

(1.2)

(1.6)

0.0

0.0

Profit Before Tax (norm)

 

 

41.2

32.3

44.3

43.8

38.0

28.3

28.2

32.7

Profit Before Tax (reported)

 

 

37.6

24.0

35.7

28.4

(30.2)

16.2

24.7

29.2

Reported tax

(7.2)

(3.2)

(4.0)

(5.4)

10.6

(3.1)

(4.9)

(5.8)

Profit After Tax (norm)

33.9

27.9

39.2

35.4

31.9

22.9

22.6

26.2

Profit After Tax (reported)

30.4

20.8

31.7

23.0

(19.6)

13.1

19.8

23.4

Minority interests

(0.2)

(0.3)

(0.2)

(0.4)

(0.4)

(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)

33.7

27.6

39.0

35.0

31.5

22.7

22.3

25.9

Net income (reported)

30.2

20.5

31.5

22.6

(20.0)

12.9

19.5

23.1

Basic average number of shares outstanding (m)

19.1

19.2

19.3

19.5

19.6

20.3

23.7

23.7

EPS - basic normalised (p)

 

 

176.1

144.1

201.8

179.4

160.6

111.6

94.3

109.5

EPS - diluted normalised (p)

 

 

172.8

141.4

198.4

176.3

160.1

111.2

94.1

109.2

EPS - basic reported (p)

 

 

157.8

107.0

163.0

115.8

(102.0)

63.4

82.5

97.7

Dividend (p)

85

55

74

94

94

18

0

58

Revenue growth (%)

17.0

2.5

16.7

3.0

20.8

6.7

(-0.8)

3.8

Gross Margin (%)

47.3

45.1

47.2

45.1

41.5

41.8

41.8

42.0

EBITDA Margin (%)

25.2

22.3

24.3

23.1

19.4

18.8

19.4

20.0

Normalised Operating Margin

22.0

17.5

19.7

18.8

14.8

13.7

13.7

14.3

BALANCE SHEET

Fixed Assets

 

 

129.2

137.4

135.2

150.5

255.1

287.1

290.6

293.4

Intangible Assets

97.7

99.6

98.8

108.8

147.4

147.9

148.9

149.7

Tangible Assets

30.7

35.9

33.5

38.5

91.5

123.0

125.5

127.5

Investments & other

0.8

1.9

2.9

3.2

16.2

16.2

16.2

16.2

Current Assets

 

 

105.1

96.0

107.0

121.7

226.6

238.3

231.8

226.4

Stocks

56.5

44.1

54.2

74.0

114.4

120.1

110.4

109.1

Debtors

33.0

34.8

30.2

30.8

42.4

42.4

42.1

43.7

Cash & cash equivalents

11.5

11.2

13.9

9.0

22.3

32.2

39.8

38.0

Other

4.1

5.9

8.7

7.9

47.5

43.5

39.5

35.5

Current Liabilities

 

 

(26.8)

(30.4)

(34.7)

(49.0)

(106.2)

(107.4)

(106.5)

(108.3)

Creditors

(22.4)

(25.2)

(28.3)

(44.7)

(52.6)

(62.0)

(61.1)

(62.9)

Tax and social security

(4.2)

(3.1)

(4.9)

(2.5)

(4.9)

(4.9)

(4.9)

(4.9)

Short term borrowings

0.0

(1.6)

(1.5)

(1.8)

(2.6)

(3.4)

(3.4)

(3.4)

Other

(0.2)

(0.5)

0.0

0.0

(46.1)

(37.1)

(37.1)

(37.1)

Long Term Liabilities

 

 

(70.1)

(64.1)

(43.0)

(50.8)

(236.0)

(234.3)

(212.6)

(190.9)

Long term borrowings

(63.5)

(57.3)

(35.2)

(39.9)

(223.1)

(221.4)

(199.7)

(178.0)

Other long term liabilities

(6.6)

(6.8)

(7.8)

(10.9)

(12.9)

(12.9)

(12.9)

(12.9)

Net Assets

 

 

137.4

138.9

164.5

172.4

139.5

183.6

203.2

220.5

Minority interests

(1.0)

(0.7)

(0.7)

(0.9)

(0.8)

(0.9)

(0.9)

(1.0)

Shareholders' equity

 

 

136.4

138.2

163.8

171.5

138.7

182.8

202.3

219.5

CASH FLOW

Op Cash Flow before WC and tax

49.2

44.5

56.8

55.5

56.4

58.3

59.7

63.9

Working capital

(21.6)

10.6

(6.2)

(4.0)

(33.5)

3.6

9.2

1.5

Exceptional & other

3.2

(4.4)

(1.7)

(10.9)

(57.7)

(16.0)

0.0

0.0

Tax

(4.1)

(4.5)

(3.3)

(4.2)

(4.1)

0.9

(0.9)

(1.8)

Net operating cash flow

 

 

26.7

46.2

45.6

36.4

(38.9)

46.9

67.9

63.6

Capex

(15.0)

(16.3)

(14.9)

(21.9)

(19.4)

(50.0)

(23.0)

(23.0)

Acquisitions/disposals

(35.4)

0.0

(0.5)

0.0

(33.0)

0.0

0.0

0.0

Net interest

(1.5)

(2.7)

(1.3)

(0.9)

(5.5)

(14.0)

(14.0)

(13.0)

Equity financing

0.6

0.5

3.5

0.6

0.0

44.2

0.0

0.0

Dividends

(15.6)

(17.2)

(7.3)

(18.4)

(19.0)

(15.0)

(0.2)

(6.1)

Other

0.0

(1.5)

(1.7)

(1.7)

(5.8)

(3.2)

(3.2)

(3.2)

Net Cash Flow

(40.2)

9.0

23.4

(5.9)

(121.6)

8.8

27.5

18.3

Opening net debt/(cash)

 

 

9.0

52.0

41.3

17.9

24.6

151.0

142.2

114.6

FX

(2.7)

1.7

0.0

(0.8)

(4.8)

0.0

0.0

0.0

Other non-cash movements

(0.1)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

52.0

41.3

17.9

24.6

151.0

142.2

114.6

96.4

Source: XP Power, Edison Investment Research

General disclaimer and copyright

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 £60,000 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.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 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.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

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 £60,000 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.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 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.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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