XP Power — Meeting elevated customer demand

XP Power (LSE: XPP)

Last close As at 24/05/2024

GBP15.66

−86.00 (−5.21%)

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GBP371m

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Research: TMT

XP Power — Meeting elevated customer demand

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.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

XP Power

Meeting elevated customer demand

Q3 trading update

Tech hardware & equipment

12 October 2020

Price

4,700p

Market cap

£913m

$1.29/£1

Net debt (£m) at end-Q320

28.2

Shares in issue

19.2m

Free float

90%

Code

XPP

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.8

30.6

100.9

Rel (local)

3.1

29.6

133.5

52-week high/low

4,600p

2,130p

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

FY20 trading update

January 2021

Analyst

Katherine Thompson

+44 (0)20 3077 5730

XP Power is a research client of Edison Investment Research Limited

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*
(£m)

Diluted EPS*
(p)

DPS
(p)

P/E
(x)

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

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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.

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.

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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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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.

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United Kingdom

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United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

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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

1185 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: Consumer

Treatt — Another solid performance

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).

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