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Research: TMT
In the process of upgrading its group-wide ERP system, XP Power suffered some short-term disruptions to shipments from mid-October to mid-November. While shipments have returned to normal levels, the company expects a revenue shortfall of c £6m for FY19, with a consequent impact on earnings. We have revised our FY19 forecasts resulting in a 10.7% reduction in our normalised EPS forecast. As order intake has been robust so far this quarter, we maintain our FY20 estimates.
XP Power |
Temporary supply issues cause Q4 shortfall |
Trading update |
Tech hardware & equipment |
11 December 2019 |
Share price performance
Business description
Next events
Analyst
XP Power is a research client of Edison Investment Research Limited |
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In the process of upgrading its group-wide ERP system, XP Power suffered some short-term disruptions to shipments from mid-October to mid-November. While shipments have returned to normal levels, the company expects a revenue shortfall of c £6m for FY19, with a consequent impact on earnings. We have revised our FY19 forecasts resulting in a 10.7% reduction in our normalised EPS forecast. As order intake has been robust so far this quarter, we maintain our FY20 estimates.
Year end |
Revenue (£m) |
PBT* |
Diluted EPS* |
DPS |
P/E |
Yield |
12/17 |
166.8 |
36.1 |
147.0 |
78.0 |
19.9 |
2.7 |
12/18 |
195.1 |
41.2 |
172.8 |
85.0 |
16.9 |
2.9 |
12/19e |
194.8 |
32.9 |
137.3 |
88.0 |
21.3 |
3.0 |
12/20e |
209.0 |
39.9 |
166.8 |
92.0 |
17.5 |
3.2 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Software upgrade disrupts Q4 shipments
XP has highlighted previously that it was upgrading its SAP ERP system across its entire global supply chain. During system migration in mid-October, XP experienced disruption to the implementation that led to shipments temporarily falling behind expected run rates. While this was resolved and shipping run rates improved to normal or higher than normal levels from mid-November, this was not enough to compensate for the earlier shortfall. Management expects a revenue shortfall for Q419/FY19 of c £6m, which it believes it can recover in Q120. Despite these supply issues, demand has been robust over the first two months of Q4, with orders 20% ahead of the same period a year ago and improvement across all sectors.
Revising FY19 estimates; FY20 unchanged
We have reduced our estimates for FY19, with a 2.5% revenue cut leading to a 10.6% reduction in normalised PBT to £32.9m and a 10.7% cut to normalised diluted EPS. We leave our FY20 forecasts unchanged – while it is possible that the company may make up the £6m revenue shortfall in Q120, we note that sterling has strengthened against the dollar in recent months, which could offset this gain.
Valuation: Positive FY20 view outweighs Q4 shortfall
The stock is up 36% year to date and 19% since the October trading update, and even closed up after yesterday’s update. The stock has partially reduced the discount versus UK electronics peers and is trading at a small discount on a P/E basis in FY19e and FY20e. It continues to trade at a larger discount to international power converter peers – while XP has seen a margin decline in FY19 resulting from a variety of factors, peers have seen a larger decline in profitability over the same period. XP has taken steps to mitigate the impact of trade tariffs between China and the US as well as preparing for Brexit; evidence that margins are benefiting from this self-help should support upside to the stock. A return to order growth from the semiconductor equipment sector would be a further trigger for upside.
Exhibit 1: Financial summary
£m |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019e |
2020e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
|||||||||||
Revenue |
|
|
93.9 |
101.1 |
101.1 |
109.7 |
129.8 |
166.8 |
195.1 |
194.8 |
209.0 |
Cost of Sales |
(49.0) |
(51.5) |
(51.0) |
(55.1) |
(67.8) |
(89.2) |
(102.8) |
(108.3) |
(114.1) |
||
Gross Profit |
44.9 |
49.6 |
50.1 |
54.6 |
62.0 |
77.6 |
92.3 |
86.5 |
94.9 |
||
EBITDA |
|
|
23.3 |
26.0 |
27.6 |
29.7 |
33.0 |
41.7 |
49.2 |
45.1 |
52.5 |
Normalised operating profit |
|
|
21.0 |
23.3 |
24.5 |
25.9 |
28.8 |
36.4 |
42.9 |
36.1 |
42.9 |
Amortisation of acquired intangibles |
0.0 |
0.0 |
0.0 |
0.0 |
(0.4) |
(0.6) |
(2.8) |
(3.2) |
(3.2) |
||
Exceptionals |
0.0 |
0.0 |
0.0 |
(0.3) |
(0.4) |
(3.3) |
(0.8) |
(2.6) |
0.0 |
||
Share-based payments |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
(0.5) |
(0.5) |
||
Reported operating profit |
21.0 |
23.3 |
24.5 |
25.6 |
28.0 |
32.5 |
39.3 |
29.8 |
39.2 |
||
Net Interest |
(0.8) |
(0.4) |
(0.2) |
(0.2) |
(0.2) |
(0.3) |
(1.7) |
(3.2) |
(3.0) |
||
Joint ventures & associates (post tax) |
0.0 |
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 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Profit Before Tax (norm) |
|
|
20.2 |
22.9 |
24.3 |
25.7 |
28.6 |
36.1 |
41.2 |
32.9 |
39.9 |
Profit Before Tax (reported) |
|
|
20.2 |
22.9 |
24.3 |
25.4 |
27.8 |
32.2 |
37.6 |
26.6 |
36.2 |
Reported tax |
(4.5) |
(4.5) |
(4.8) |
(5.5) |
(6.3) |
(3.6) |
(7.2) |
(4.8) |
(6.5) |
||
Profit After Tax (norm) |
15.7 |
18.4 |
19.5 |
20.2 |
22.3 |
28.8 |
33.9 |
27.0 |
32.7 |
||
Profit After Tax (reported) |
15.7 |
18.4 |
19.5 |
19.9 |
21.5 |
28.6 |
30.4 |
21.8 |
29.7 |
||
Minority interests |
(0.2) |
(0.2) |
(0.1) |
(0.2) |
(0.2) |
(0.3) |
(0.2) |
(0.3) |
(0.3) |
||
Discontinued operations |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Net income (normalised) |
15.5 |
18.2 |
19.4 |
20.0 |
22.1 |
28.5 |
33.7 |
26.7 |
32.5 |
||
Net income (reported) |
15.5 |
18.2 |
19.4 |
19.7 |
21.3 |
28.3 |
30.2 |
21.6 |
29.4 |
||
Basic ave. number of shares outstanding (m) |
19 |
19 |
19 |
19 |
19 |
19 |
19 |
19 |
19 |
||
EPS - basic normalised (p) |
|
|
81.7 |
95.8 |
102.1 |
105.3 |
116.2 |
149.4 |
176.1 |
139.9 |
170.0 |
EPS - diluted normalised (p) |
|
|
81.3 |
95.1 |
101.1 |
104.3 |
115.3 |
147.0 |
172.8 |
137.3 |
166.8 |
EPS - basic reported (p) |
|
|
81.7 |
95.8 |
102.1 |
103.7 |
112.0 |
148.3 |
157.8 |
112.9 |
154.1 |
Dividend (p) |
50 |
55 |
61 |
66 |
71 |
78 |
85 |
88 |
92 |
||
Revenue growth (%) |
(9.4) |
7.7 |
0.0 |
8.5 |
18.3 |
28.5 |
17.0 |
(-0.2) |
7.3 |
||
Gross Margin (%) |
47.8 |
49.1 |
49.6 |
49.8 |
47.8 |
46.5 |
47.3 |
44.4 |
45.4 |
||
EBITDA Margin (%) |
24.8 |
25.7 |
27.3 |
27.0 |
25.4 |
25.0 |
25.2 |
23.2 |
25.1 |
||
Normalised Operating Margin |
22.4 |
23.0 |
24.2 |
23.6 |
22.2 |
21.8 |
22.0 |
18.5 |
20.5 |
||
BALANCE SHEET |
|||||||||||
Fixed Assets |
|
|
52.8 |
53.3 |
56.1 |
65.4 |
73.2 |
88.1 |
129.2 |
141.7 |
144.9 |
Intangible Assets |
38.1 |
39.1 |
40.5 |
48.2 |
53.0 |
63.9 |
97.7 |
103.3 |
105.1 |
||
Tangible Assets |
13.2 |
12.7 |
14.4 |
16.1 |
19.1 |
22.5 |
30.7 |
37.6 |
39.0 |
||
Investments & other |
1.5 |
1.5 |
1.2 |
1.1 |
1.1 |
1.7 |
0.8 |
0.8 |
0.8 |
||
Current Assets |
|
|
39.3 |
42.2 |
47.0 |
53.5 |
65.7 |
83.5 |
105.1 |
101.6 |
107.3 |
Stocks |
19.8 |
20.4 |
25.2 |
28.7 |
32.2 |
37.8 |
56.5 |
56.4 |
56.3 |
||
Debtors |
14.2 |
15.4 |
16.0 |
17.5 |
21.5 |
23.8 |
33.0 |
32.0 |
34.4 |
||
Cash & cash equivalents |
4.1 |
5.0 |
3.8 |
4.9 |
9.2 |
15.0 |
11.5 |
9.1 |
12.6 |
||
Other |
1.2 |
1.4 |
2.0 |
2.4 |
2.8 |
6.9 |
4.1 |
4.1 |
4.1 |
||
Current Liabilities |
|
|
(20.2) |
(22.4) |
(18.6) |
(19.8) |
(25.8) |
(25.1) |
(26.8) |
(30.9) |
(32.0) |
Creditors |
(11.1) |
(12.7) |
(14.4) |
(14.6) |
(16.1) |
(21.4) |
(22.4) |
(24.6) |
(25.7) |
||
Tax and social security |
(1.6) |
(1.1) |
(1.7) |
(1.2) |
(3.3) |
(3.5) |
(4.2) |
(4.2) |
(4.2) |
||
Short term borrowings |
(7.3) |
(8.5) |
(2.5) |
(4.0) |
(5.5) |
0.0 |
0.0 |
(1.9) |
(1.9) |
||
Other |
(0.2) |
(0.1) |
0.0 |
0.0 |
(0.9) |
(0.2) |
(0.2) |
(0.2) |
(0.2) |
||
Long Term Liabilities |
|
|
(10.6) |
(3.7) |
(4.2) |
(10.0) |
(6.2) |
(29.6) |
(70.1) |
(68.0) |
(63.0) |
Long term borrowings |
(7.4) |
0.0 |
0.0 |
(4.6) |
0.0 |
(24.0) |
(63.5) |
(61.4) |
(56.4) |
||
Other long term liabilities |
(3.2) |
(3.7) |
(4.2) |
(5.4) |
(6.2) |
(5.6) |
(6.6) |
(6.6) |
(6.6) |
||
Net Assets |
|
|
61.3 |
69.4 |
80.3 |
89.1 |
106.9 |
116.9 |
137.4 |
144.3 |
157.1 |
Minority interests |
(0.2) |
(0.2) |
(0.1) |
(0.8) |
(0.8) |
(0.9) |
(1.0) |
(1.1) |
(1.1) |
||
Shareholders' equity |
|
|
61.1 |
69.2 |
80.2 |
88.3 |
106.1 |
116.0 |
136.4 |
143.2 |
156.0 |
CASH FLOW |
|||||||||||
Op Cash Flow before WC and tax |
23.3 |
26.0 |
27.6 |
29.7 |
33.0 |
41.7 |
49.2 |
45.1 |
52.5 |
||
Working capital |
4.2 |
(0.3) |
(4.1) |
(4.6) |
(6.1) |
0.4 |
(21.6) |
3.3 |
(1.1) |
||
Exceptional & other |
0.4 |
(0.5) |
1.9 |
0.6 |
5.1 |
(6.3) |
3.2 |
(2.6) |
0.0 |
||
Tax |
(4.3) |
(5.0) |
(3.6) |
(4.7) |
(4.1) |
(6.1) |
(4.1) |
(4.8) |
(6.5) |
||
Net operating cash flow |
|
|
23.6 |
20.2 |
21.8 |
21.0 |
27.9 |
29.7 |
26.7 |
41.0 |
44.8 |
Capex |
(4.7) |
(3.2) |
(5.8) |
(5.4) |
(6.8) |
(10.1) |
(15.0) |
(18.4) |
(16.0) |
||
Acquisitions/disposals |
(1.6) |
0.1 |
0.1 |
(8.3) |
0.1 |
(18.3) |
(35.4) |
0.0 |
0.0 |
||
Net interest |
(0.5) |
(0.3) |
(0.1) |
(0.1) |
(0.2) |
(0.2) |
(1.5) |
(3.2) |
(3.0) |
||
Equity financing |
(0.5) |
0.1 |
(0.2) |
0.0 |
0.2 |
(0.2) |
0.6 |
0.0 |
0.0 |
||
Dividends |
(9.1) |
(10.1) |
(11.0) |
(12.2) |
(13.1) |
(14.2) |
(15.6) |
(16.8) |
(17.4) |
||
Other |
0.5 |
0.2 |
0.1 |
0.2 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Net Cash Flow |
7.7 |
7.0 |
4.9 |
(4.8) |
8.1 |
(13.3) |
(40.2) |
2.6 |
8.5 |
||
Opening net debt/(cash) |
|
|
18.6 |
10.6 |
3.5 |
(1.3) |
3.7 |
(3.7) |
9.0 |
52.0 |
54.2 |
FX |
0.3 |
0.1 |
(0.1) |
(0.2) |
(0.5) |
0.6 |
(2.7) |
0.0 |
0.0 |
||
Other non-cash movements |
0.0 |
0.0 |
0.0 |
0.1 |
(0.2) |
0.0 |
(0.1) |
(4.8) |
0.0 |
||
Closing net debt/(cash) |
|
|
10.6 |
3.5 |
(1.3) |
3.7 |
(3.7) |
9.0 |
52.0 |
54.2 |
45.7 |
Source: XP Power, Edison Investment Research
|
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Research: Financials
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