XP Power — Healthcare customers boost Q1 book-to-bill

XP Power (LSE: XPP)

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Research: TMT

XP Power — Healthcare customers boost Q1 book-to-bill

XP Power’s Q1 trading update confirmed that revenues increased 4% y o y/q o q and the Chinese facility has returned to normal staffing levels. Strong demand, mainly from healthcare customers, saw a 25% q o q increase in orders and a Q1 book-to-bill of 1.49x. Despite strong Q1 demand, the level of uncertainty surrounding both supply and demand for the rest of the year has caused XP to cancel its previously proposed Q419 dividend in order to preserve cash. We maintain our revenue forecasts, but factor in higher costs in FY20 and remove our Q419 and Q120 dividend estimates.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

XP Power

Healthcare customers boost Q1 book-to-bill

Q1 trading update

Tech hardware & equipment

3 April 2020

Price

2,510p

Market cap

£480m

$1.24/£

Net debt (£m) at end Q120

45.3

Shares in issue

19.1m

Free float

90%

Code

XPP

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(16.3)

(18.2)

3.7

Rel (local)

3.4

15.4

39.6

52-week high/low

3,820p

2,010p

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

AGM

21 April 2020

Analyst

Katherine Thompson

+44 203 077 5730

XP Power is a research client of Edison Investment Research Limited

XP Power’s Q1 trading update confirmed that revenues increased 4% yoy/qoq and the Chinese facility has returned to normal staffing levels. Strong demand, mainly from healthcare customers, saw a 25% qoq increase in orders and a Q1 book-to-bill of 1.49x. Despite strong Q1 demand, the level of uncertainty surrounding both supply and demand for the rest of the year has caused XP to cancel its previously proposed Q419 dividend in order to preserve cash. We maintain our revenue forecasts, but factor in higher costs in FY20 and remove our Q419 and Q120 dividend estimates.

Year end

Revenue (£m)

PBT*
(£m)

Diluted EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/18

195.1

41.2

172.8

85.0

14.5

3.4

12/19

199.9

33.2

145.5

55.0

17.3

2.2

12/20e

209.2

37.1

158.5

77.0

15.8

3.1

12/21e

218.2

42.8

179.1

99.0

14.0

3.9

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

Q1 order intake spikes on healthcare demand

XP received orders worth £73.1m in Q120, up 34% y-o-y (up 33% constant currency) and up 25% q-o-q. The healthcare sector was particularly strong (XP is designed into c 60 different ventilators) but other sectors were also robust. Q1 revenues of £49.1m were up 4% y-o-y/q-o-q despite the supply chain challenges in China. The Chinese facility is now back up to full strength and Vietnam is also fully operational. End Q120 net debt stood at £45.3m; the company has committed liquidity of £50m through bank loans and cash facilities. XP has decided to withdraw the resolution for the previously announced final 36p dividend, which will preserve £6.9m in cash, and will look to resume paying quarterly dividends as soon as possible.

Outlook uncertain for the remainder of the year

Q1 order intake was higher than we had expected, but it is unclear how much of it is incremental new business and how much is demand being pulled in from H220. In addition, weaker sterling versus the dollar could provide upside to our revenue forecasts. We make no change to our revenue forecasts, as although the Q1 order intake would indicate a revenue upgrade, there is too much uncertainty over demand for the rest of FY20 as well as the potential for COVID-19 restrictions to hamper XP’s ability to deliver product. We factor in higher costs in FY20 to deal with disruptions in the supply chain and cut Q419 and Q120 dividends to zero.

Valuation: Uncertainty weighing on the share price

Since XP reported FY19 results on 3 March, the stock has declined 23% on fears of further COVID-19 disruption. On a P/E basis, XP continues to trade at a material discount to global power converter companies and a smaller discount to UK electronics companies, despite generating EBIT margins at the top end of the peer group. Until there is more clarity on the longer-term global economic implications of COVID-19, we would expect the shares to tread water. However, we highlight XP’s strong backlog and access to funding, which should support it during this period.

Changes to forecasts

Exhibit 1: Changes to forecasts

£m

FY20e

FY20e

y-o-y

FY21e

FY21e

y-o-y

Old

New

Change

Old

New

Change

Revenues

209.2

209.2

0.0%

4.7%

218.2

218.2

0.0%

4.3%

Gross profit

95.0

94.3

(0.7%)

4.6%

100.3

100.1

(0.1%)

6.2%

Gross margin

45.4%

45.1%

(0.3%)

(0.0%)

45.9%

45.9%

(0.1%)

0.8%

EBITDA

51.3

49.5

(3.4%)

9.1%

55.3

55.3

0.0%

11.6%

EBITDA margin

24.5%

23.7%

(0.8%)

1.0%

25.3%

25.3%

0.0%

1.7%

Normalised operating profit

41.4

39.6

(4.2%)

10.4%

45.1

45.1

0.0%

13.7%

Normalised operating profit margin

19.8%

18.9%

(0.8%)

1.0%

20.7%

20.7%

0.0%

1.7%

Reported operating profit

34.2

32.4

(5.1%)

21.5%

41.4

41.4

0.0%

27.6%

Reported operating margin

16.3%

15.5%

(0.8%)

2.2%

19.0%

19.0%

0.0%

3.5%

Normalised PBT

38.9

37.1

(4.5%)

11.9%

42.8

42.8

0.0%

15.2%

Reported PBT

31.7

29.9

(5.5%)

24.8%

39.1

39.1

0.0%

30.5%

Normalised net income

32.3

30.9

(4.4%)

8.6%

34.9

34.9

0.0%

13.0%

Reported net income

25.7

24.3

(5.6%)

18.6%

31.8

31.8

0.0%

30.9%

Normalised basic EPS (p)

169.1

161.6

(4.4%)

9.0%

182.5

182.5

0.0%

13.0%

Normalised diluted EPS (p)

165.9

158.5

(4.4%)

9.0%

179.1

179.1

0.0%

13.0%

Reported basic EPS (p)

134.8

127.3

(5.6%)

18.9%

166.6

166.6

0.0%

30.9%

Dividend per share (p)

95.0

77.0

(18.9%)

40.0%

99.0

99.0

0.0%

28.6%

Net debt/(cash)

46.9

39.5

(15.9%)

(17.3%)

38.4

31.1

(19.2%)

(21.3%)

Net debt/(cash) pre-lease liabilities

42.0

34.6

(17.8%)

(16.3%)

35.0

27.7

(20.0%)

Source: Edison Investment Research


Exhibit 2: Financial summary

£m

2015

2016

2017

2018

2019

2020e

2021e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

109.7

129.8

166.8

195.1

199.9

209.2

218.2

Cost of Sales

(55.1)

(67.8)

(89.2)

(102.8)

(109.8)

(114.9)

(118.1)

Gross Profit

54.6

62.0

77.6

92.3

90.1

94.3

100.1

EBITDA

 

 

29.7

33.0

41.7

49.2

45.4

49.5

55.3

Normalised operating profit

 

 

25.9

28.8

36.4

42.9

35.9

39.6

45.1

Amortisation of acquired intangibles

0.0

(0.4)

(0.6)

(2.8)

(3.2)

(3.2)

(3.2)

Exceptionals

(0.3)

(0.4)

(3.3)

(0.8)

(6.0)

(3.5)

0.0

Share-based payments

0.0

0.0

0.0

0.0

0.0

(0.5)

(0.5)

Reported operating profit

25.6

28.0

32.5

39.3

26.7

32.4

41.4

Net Interest

(0.2)

(0.2)

(0.3)

(1.7)

(2.7)

(2.5)

(2.3)

Joint ventures & associates (post tax)

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

Profit Before Tax (norm)

 

 

25.7

28.6

36.1

41.2

33.2

37.1

42.8

Profit Before Tax (reported)

 

 

25.4

27.8

32.2

37.6

24.0

29.9

39.1

Reported tax

(5.5)

(6.3)

(3.6)

(7.2)

(3.2)

(5.4)

(7.0)

Profit After Tax (norm)

20.2

22.3

28.8

33.9

28.7

31.1

35.1

Profit After Tax (reported)

19.9

21.5

28.6

30.4

20.8

24.6

32.1

Minority interests

(0.2)

(0.2)

(0.3)

(0.2)

(0.3)

(0.3)

(0.3)

Discontinued operations

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

28.4

30.9

34.9

Net income (reported)

19.7

21.3

28.3

30.2

20.5

24.3

31.8

Basic average number of shares outstanding (m)

19

19

19

19

19

19

19

EPS - basic normalised (p)

 

 

105.3

116.2

149.4

176.1

148.3

161.6

182.5

EPS - diluted normalised (p)

 

 

104.3

115.3

147.0

172.8

145.5

158.5

179.1

EPS - basic reported (p)

 

 

103.7

112.0

148.3

157.8

107.0

127.3

166.6

Dividend (p)

66

71

78

85

55

77

99

Revenue growth (%)

8.5

18.3

28.5

17.0

2.5

4.7

4.3

Gross Margin (%)

49.8

47.8

46.5

47.3

45.1

45.1

45.9

EBITDA Margin (%)

27.0

25.4

25.0

25.2

22.7

23.7

25.3

Normalised Operating Margin

23.6

22.2

21.8

22.0

18.0

18.9

20.7

BALANCE SHEET

Fixed Assets

 

 

65.4

73.2

88.1

129.2

137.4

142.8

145.9

Intangible Assets

48.2

53.0

63.9

97.7

99.6

104.7

106.1

Tangible Assets

16.1

19.1

22.5

30.7

35.9

36.2

37.9

Investments & other

1.1

1.1

1.7

0.8

1.9

1.9

1.9

Current Assets

 

 

53.5

65.7

83.5

105.1

96.0

101.7

106.4

Stocks

28.7

32.2

37.8

56.5

44.1

46.2

47.4

Debtors

17.5

21.5

23.8

33.0

34.8

36.7

38.3

Cash & cash equivalents

4.9

9.2

15.0

11.5

11.2

12.9

14.8

Other

2.4

2.8

6.9

4.1

5.9

5.9

5.9

Current Liabilities

 

 

(19.8)

(25.8)

(25.1)

(26.8)

(30.4)

(30.6)

(31.1)

Creditors

(14.6)

(16.1)

(21.4)

(22.4)

(25.2)

(25.4)

(25.9)

Tax and social security

(1.2)

(3.3)

(3.5)

(4.2)

(3.1)

(3.1)

(3.1)

Short term borrowings

(4.0)

(5.5)

0.0

0.0

(1.6)

(1.6)

(1.6)

Other

0.0

(0.9)

(0.2)

(0.2)

(0.5)

(0.5)

(0.5)

Long Term Liabilities

 

 

(10.0)

(6.2)

(29.6)

(70.1)

(64.1)

(57.6)

(51.1)

Long term borrowings

(4.6)

0.0

(24.0)

(63.5)

(57.3)

(50.8)

(44.3)

Other long term liabilities

(5.4)

(6.2)

(5.6)

(6.6)

(6.8)

(6.8)

(6.8)

Net Assets

 

 

89.1

106.9

116.9

137.4

138.9

156.2

170.1

Minority interests

(0.8)

(0.8)

(0.9)

(1.0)

(0.7)

(1.1)

(1.1)

Shareholders' equity

 

 

88.3

106.1

116.0

136.4

138.2

155.1

169.0

CASH FLOW

Op Cash Flow before WC and tax

29.7

33.0

41.7

49.2

45.4

49.5

55.3

Working capital

(4.6)

(6.1)

0.4

(21.6)

10.6

(3.8)

(2.3)

Exceptional & other

0.6

5.1

(6.3)

3.2

(5.3)

(3.5)

0.0

Tax

(4.7)

(4.1)

(6.1)

(4.1)

(4.5)

(5.4)

(7.0)

Net operating cash flow

 

 

21.0

27.9

29.7

26.7

46.2

36.9

45.9

Capex

(5.4)

(6.8)

(10.1)

(15.0)

(16.3)

(18.5)

(16.5)

Acquisitions/disposals

(8.3)

0.1

(18.3)

(35.4)

0.0

0.0

0.0

Net interest

(0.1)

(0.2)

(0.2)

(1.5)

(2.7)

(2.5)

(2.3)

Equity financing

0.0

0.2

(0.2)

0.6

0.5

0.0

0.0

Dividends

(12.2)

(13.1)

(14.2)

(15.6)

(17.2)

(7.7)

(18.7)

Other

0.2

0.0

0.0

0.0

(1.5)

(1.5)

(1.5)

Net Cash Flow

(4.8)

8.1

(13.3)

(40.2)

9.0

6.7

6.9

Opening net debt/(cash)

 

 

(1.3)

3.7

(3.7)

9.0

52.0

41.3

34.6

FX

(0.2)

(0.5)

0.6

(2.7)

1.7

0.0

0.0

Other non-cash movements

0.1

(0.2)

0.0

(0.1)

0.0

0.0

0.0

Closing net debt/(cash)

 

 

3.7

(3.7)

9.0

52.0

41.3

34.6

27.7

Source: XP Power accounts, 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.

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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

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Research: Metals & Mining

Wheaton Precious Metals — Swings and roundabouts

On 1 April, Wheaton Precious Metals (WPM) announced that all of its partners’ mines are operational, with the exception of Voisey’s Bay, Constancia, Yauliyacu and Penasquito. Voisey’s Bay is not scheduled to deliver cobalt to WPM until FY21, so its temporary furlough will make no difference to FY20 estimates. However, other mines at risk of temporary closure include San Dimas and Los Filos in Mexico. As a result, WPM has withdrawn its production guidance for FY20. However, assuming these mines remain closed throughout Q220, but at higher prevailing metals prices (see Exhibit 1, overleaf), our FY20 EPS forecast for WPM has increased by 18.6%.

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