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Research: TMT
XP Power’s Q3 trading update confirmed that production volumes grew rapidly in its Asian facilities, allowing the company to satisfy some of the orders placed in H120. As expected, bookings returned to a more normal level in Q3. XP reported 28% y-o-y growth in revenues for Q3, prompting upgrades to our FY20/21 revenue and EPS forecasts. The company also announced that CEO Duncan Penny will retire at the end of the year, to be replaced by current CFO Gavin Griggs from 1 January 2021.
XP Power |
Meeting elevated customer demand |
Q3 trading update |
Tech hardware & equipment |
12 October 2020 |
Share price performance
Business description
Next event
Analyst
XP Power is a research client of Edison Investment Research Limited |
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XP Power’s Q3 trading update confirmed that production volumes grew rapidly in its Asian facilities, allowing the company to satisfy some of the orders placed in H120. As expected, bookings returned to a more normal level in Q3. XP reported 28% y-o-y growth in revenues for Q3, prompting upgrades to our FY20/21 revenue and EPS forecasts. The company also announced that CEO Duncan Penny will retire at the end of the year, to be replaced by current CFO Gavin Griggs from 1 January 2021.
Year end |
Revenue (£m) |
PBT* |
Diluted EPS* |
DPS |
P/E |
Yield |
12/18 |
195.1 |
41.2 |
172.8 |
85.0 |
27.2 |
1.8 |
12/19 |
199.9 |
33.2 |
145.5 |
55.0 |
32.3 |
1.2 |
12/20e |
230.7 |
40.6 |
162.9 |
68.0 |
28.8 |
1.4 |
12/21e |
233.8 |
43.2 |
173.2 |
87.0 |
27.1 |
1.9 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Q3 production ramps up to meet demand
In Q320, XP Power reported revenue of £69.0m, +28% y-o-y and +23% q-o-q, as the company ramped up production to meet the backlog generated in H120 by healthcare and semiconductor equipment customers. Bookings in Q3 fell back to a more normal level of £56.3m, +1% y-o-y and -23% q-o-q to close the quarter with a backlog of £125.7m (Q220 £138.2m). Q3 book-to-bill was 0.82x while 9M20 book-to-bill was 1.16x. XP announced a 20p dividend for Q3, ahead of our 19p forecast. Net debt at quarter-end had declined to £28.2m from £34.4m at the end of H120.
Upgrading forecasts
Management noted that while demand across all sectors is generally encouraging, healthcare orders have normalised and it does not expect a repeat of the exceptional demand experienced in H1. It estimates that c £15–20m (7–10%) of 9M20 orders were linked to COVID-19. The board anticipates FY20 performance at the top end of consensus expectations, but sounded a note of caution on the level of uncertainty over a potential second wave of COVID-19 as well as global trade tensions. We have raised our revenue forecasts to reflect the high level of shipments in Q3. We increase our FY20 revenue forecast by 4.9% and FY21 by 2.6%, resulting in upgrades to our normalised EPS forecast of 8.0% in FY20 and 3.7% in FY21.
Valuation: Reflects strong order intake
The share has more than doubled from its low in March and is up 51% year-to-date. On a P/E basis, it is trading at a premium to global power converter companies. It is trading in line with UK electronics companies for FY20 and at a 22% premium for FY21, while generating EBIT margins ahead of both peer groups. While there remains uncertainty over demand during this period of disruption, we highlight XP’s strong backlog and balance sheet.
Changes to forecasts
Exhibit 1: Changes to forecasts
£m |
FY20e |
FY20e |
FY21e |
FY21e |
||||
Old |
New |
Change |
y-o-y |
Old |
New |
Change |
y-o-y |
|
Revenues |
220.0 |
230.7 |
4.9% |
15.4% |
227.9 |
233.8 |
2.6% |
1.3% |
Gross profit |
98.8 |
103.9 |
5.2% |
15.3% |
103.4 |
106.0 |
2.6% |
2.0% |
Gross margin |
44.9% |
45.0% |
0.2% |
(0.0%) |
45.4% |
45.3% |
(0.0%) |
0.3% |
EBITDA |
51.1 |
54.0 |
5.8% |
19.0% |
55.5 |
57.0 |
2.8% |
5.5% |
EBITDA margin |
23.2% |
23.4% |
0.2% |
0.7% |
24.3% |
24.4% |
0.0% |
1.0% |
Normalised operating profit |
39.7 |
42.6 |
7.5% |
18.8% |
43.7 |
45.2 |
3.5% |
6.0% |
Normalised operating margin |
18.0% |
18.5% |
0.5% |
0.5% |
19.2% |
19.3% |
0.2% |
0.9% |
Reported operating profit |
28.9 |
31.8 |
10.3% |
19.2% |
40.5 |
42.0 |
3.8% |
31.9% |
Reported operating margin |
13.1% |
13.8% |
0.7% |
0.4% |
17.8% |
18.0% |
0.2% |
4.2% |
Normalised PBT |
37.7 |
40.6 |
7.9% |
22.4% |
41.7 |
43.2 |
3.7% |
6.3% |
Reported PBT |
26.9 |
29.8 |
11.1% |
24.3% |
38.5 |
40.0 |
4.0% |
34.1% |
Normalised net income |
29.9 |
32.3 |
8.0% |
13.6% |
33.1 |
34.3 |
3.7% |
6.3% |
Reported net income |
21.2 |
23.6 |
11.2% |
15.2% |
30.5 |
31.7 |
4.0% |
34.4% |
Normalised basic EPS (p) |
153.8 |
166.0 |
8.0% |
12.0% |
170.2 |
176.5 |
3.7% |
6.3% |
Normalised diluted EPS (p) |
150.9 |
162.9 |
8.0% |
12.0% |
167.0 |
173.2 |
3.7% |
6.3% |
Reported basic EPS (p) |
109.3 |
121.5 |
11.2% |
13.5% |
157.0 |
163.3 |
4.0% |
34.4% |
Dividend per share (p) |
67.0 |
68.0 |
1.5% |
23.6% |
87.0 |
87.0 |
0.0% |
27.9% |
Net debt/(cash) |
39.9 |
38.2 |
(4.2%) |
(7.5%) |
31.1 |
27.2 |
(12.6%) |
(28.7%) |
Source: Edison Investment Research
Exhibit 2: Financial summary
£m |
2015 |
2016 |
2017 |
2018 |
2019 |
2020e |
2021e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
|||||||||
Revenue |
|
|
109.7 |
129.8 |
166.8 |
195.1 |
199.9 |
230.7 |
233.8 |
Cost of Sales |
(55.1) |
(67.8) |
(89.2) |
(102.8) |
(109.8) |
(126.8) |
(127.8) |
||
Gross Profit |
54.6 |
62.0 |
77.6 |
92.3 |
90.1 |
103.9 |
106.0 |
||
EBITDA |
|
|
29.7 |
33.0 |
41.7 |
49.2 |
45.4 |
54.0 |
57.0 |
Normalised operating profit |
|
|
25.9 |
28.8 |
36.4 |
42.9 |
35.9 |
42.6 |
45.2 |
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) |
(7.6) |
0.0 |
||
Share-based payments |
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 |
31.8 |
42.0 |
||
Net Interest |
(0.2) |
(0.2) |
(0.3) |
(1.7) |
(2.7) |
(2.0) |
(2.0) |
||
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 |
40.6 |
43.2 |
Profit Before Tax (reported) |
|
|
25.4 |
27.8 |
32.2 |
37.6 |
24.0 |
29.8 |
40.0 |
Reported tax |
(5.5) |
(6.3) |
(3.6) |
(7.2) |
(3.2) |
(6.0) |
(8.0) |
||
Profit After Tax (norm) |
20.2 |
22.3 |
28.8 |
33.9 |
28.7 |
32.5 |
34.5 |
||
Profit After Tax (reported) |
19.9 |
21.5 |
28.6 |
30.4 |
20.8 |
23.9 |
32.0 |
||
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 |
32.3 |
34.3 |
||
Net income (reported) |
19.7 |
21.3 |
28.3 |
30.2 |
20.5 |
23.6 |
31.7 |
||
Basic ave.number of shares outstanding (m) |
19.0 |
19.0 |
19.1 |
19.1 |
19.2 |
19.4 |
19.4 |
||
EPS - basic normalised (p) |
|
|
105.3 |
116.2 |
149.4 |
176.1 |
148.3 |
166.0 |
176.5 |
EPS - diluted normalised (p) |
|
|
104.3 |
115.3 |
147.0 |
172.8 |
145.5 |
162.9 |
173.2 |
EPS - basic reported (p) |
|
|
103.7 |
112.0 |
148.3 |
157.8 |
107.0 |
121.5 |
163.3 |
Dividend (p) |
66 |
71 |
78 |
85 |
55 |
68 |
87 |
||
Revenue growth (%) |
8.5 |
18.3 |
28.5 |
17.0 |
2.5 |
15.4 |
1.3 |
||
Gross Margin (%) |
49.8 |
47.8 |
46.5 |
47.3 |
45.1 |
45.0 |
45.3 |
||
EBITDA Margin (%) |
27.0 |
25.4 |
25.0 |
25.2 |
22.7 |
23.4 |
24.4 |
||
Normalised Operating Margin |
23.6 |
22.2 |
21.8 |
22.0 |
18.0 |
18.5 |
19.3 |
||
BALANCE SHEET |
|||||||||
Fixed Assets |
|
|
65.4 |
73.2 |
88.1 |
129.2 |
137.4 |
141.1 |
142.6 |
Intangible Assets |
48.2 |
53.0 |
63.9 |
97.7 |
99.6 |
102.7 |
103.3 |
||
Tangible Assets |
16.1 |
19.1 |
22.5 |
30.7 |
35.9 |
36.5 |
37.4 |
||
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 |
105.4 |
112.3 |
Stocks |
28.7 |
32.2 |
37.8 |
56.5 |
44.1 |
50.4 |
50.8 |
||
Debtors |
17.5 |
21.5 |
23.8 |
33.0 |
34.8 |
39.8 |
40.4 |
||
Cash & cash equivalents |
4.9 |
9.2 |
15.0 |
11.5 |
11.2 |
9.3 |
15.3 |
||
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) |
(34.2) |
(34.3) |
Creditors |
(14.6) |
(16.1) |
(21.4) |
(22.4) |
(25.2) |
(29.0) |
(29.1) |
||
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 |
154.6 |
169.5 |
Minority interests |
(0.8) |
(0.8) |
(0.9) |
(1.0) |
(0.7) |
(0.8) |
(0.8) |
||
Shareholders' equity |
|
|
88.3 |
106.1 |
116.0 |
136.4 |
138.2 |
153.8 |
168.7 |
CASH FLOW |
|||||||||
Op Cash Flow before WC and tax |
29.7 |
33.0 |
41.7 |
49.2 |
45.4 |
54.0 |
57.0 |
||
Working capital |
(4.6) |
(6.1) |
0.4 |
(21.6) |
10.6 |
(7.5) |
(0.9) |
||
Exceptional & other |
0.6 |
5.1 |
(6.3) |
3.2 |
(5.3) |
(6.4) |
0.0 |
||
Tax |
(4.7) |
(4.1) |
(6.1) |
(4.1) |
(4.5) |
(6.0) |
(8.0) |
||
Net operating cash flow |
|
|
21.0 |
27.9 |
29.7 |
26.7 |
46.2 |
34.2 |
48.1 |
Capex |
(5.4) |
(6.8) |
(10.1) |
(15.0) |
(16.3) |
(19.5) |
(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) |
(2.0) |
(2.0) |
||
Equity financing |
0.0 |
0.2 |
(0.2) |
0.6 |
0.5 |
(0.6) |
0.0 |
||
Dividends |
(12.2) |
(13.1) |
(14.2) |
(15.6) |
(17.2) |
(7.5) |
(17.1) |
||
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 |
3.1 |
11.0 |
||
Opening net debt/(cash) |
|
|
(1.3) |
3.7 |
(3.7) |
9.0 |
52.0 |
41.3 |
38.2 |
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 |
38.2 |
27.2 |
Source: XP Power, Edison Investment Research
|
|
Research: Consumer
Treatt has had another successful year, and the COVID-19 pandemic so far has not materially affected trading performance. The sharp fall in citrus prices has had an impact on revenue growth, which is down 3% at constant currency for FY20. However, profit performance was strong as there was good growth in the other parts of the business, with health & wellness and fruit & vegetables posting double-digit revenue growth, and with the higher-margin parts of the business continuing to outperform. The UK relocation project continues, with construction nearing completion and a move to the new site expected in spring 2021, and the outlook for FY21 is cautiously optimistic. Our fair value increases to 670p (from 560p).