XP Power has now released its interim results for the year ending 2015.
Overall revenues were up year on year, mainly as a result of currency exchange movements, as a small fall in Asian revenue was more than offset by a £2.3M increase in N. American revenue and a £1.5M growth in European revenue. Cost of sales also increased due to an increase in the purchase of inventories. R&D expenses increased too along with other operating costs, partly as a result of the strong US dollar and the increase in sales and engineering resources announced last time. The pre-tax profit came in at £12.6M, an increase of £400K when compared to the first half of last year. After an increased tax bill, the profit for the year was £9.6M, a decline of £100K year on year.
When compared to the end point of last year, total assets increased by £5.1M driven by a £2.3M growth in trade receivables and a £600K increase in inventories, derivative financial instruments and property, plant and equipment. Liabilities also increased during the period, mainly due to a £1.8M increase in the overdraft. The end result is a net tangible asset level of £42.1M, an increase of £2.3M during the six month period.
Before movements in working capital, cash profits increased by £1M to £14.3M. This was reversed by an increase in receivables and after tax, there was an £8.5M cash inflow from operations. The group spent £1.3M of this on fixed assets, £1.4M on R&D and £600K on the acquisition of a subsidiary to give a free cash flow of £5.1M. This did not cover the dividends, however, to give a cash outflow of £1.8M for the period and a cash level of -£400K. A decent enough performance, but I still feel they shouldn’t be paying quite so much of this cash out as dividends.
Order intake in the first half of the year surpassed revenues as it did last year, increasing by 11% to £56.5M, so overall momentum continues to build in the business and the group enters the second half of the year with a strong order backlog. The European business achieved very strong order intake and revenue growth after experiencing some weakness in the second half of last year. In contrast the North America business, which showed strong momentum in the second half of 2014, has slowed as customers placed orders at lower levels and revenues grew at a slower rate than in the second half of last year.
There was no profit or loss at the Asian business compared to a £1.1M profit in the first half of last year. The profit at the European business was £3.8M, a decline of £500K year on year. The profit at the North American business was £7.4M, an increase of £900K when compared to the first half of 2014.
Revenues from healthcare grew 13% to £17.3M driven by new programmes with key accounts, particularly in Europe, as well as existing programmes coming back to life. Healthcare is benefiting from design wins entering production from larger accounts where XP has gained approved or preferred supplier status in recent years. Industrial declined by 3% to £24M, primarily driven by North American accounts while the industrial business in Europe showed good growth. After a prolonged period in the doldrums, the technology sector grew by 25% compared to the first half of 2014 to £12.6M.
Gross margin fell slightly from 49.8% to 49.4% primarily due to start-up costs relating to the production of the first complete power converters in the Vietnam facility. It is expected that the factory will make a net contribution to margins in the second half of the year as production volumes running through the facility increase. The operating margin also reduced, falling from 24.5% to 23.6%.
The significant number of new products introduced over the last three years is yet to have a material impact on group revenues, given the time lag from launch to them entering production due to the lengthy design cycles required by customers to qualify the power converter in their equipment and then gain the necessary safety agency approvals. The group launched 13 new products during the period. Of these products, 10 are high efficiency products and more are being launched with digital control, an example of this is the GSP00. They have also released a version of their industrial 1.5KW product with digital control.
With larger customers continuing to reduce the number of vendors they deal with, the group’s broad product offering and in-house manufacturing capability apparently leave them well placed to secure further preferred supplier agreements. The production of the magnetic components in Vietnam is mitigating the continued rise of Chinese labour costs. They now have 27 part numbers approved for production in Vietnam with many more in the pipeline. Of the 590,000 power converters produced during the period, some 24,000 of these were produced in the Vietnamese facility and the start-up costs reduced profits by about £400K during the first half of the year.
In May the group acquired a 51% stake in a value added distributer of power products based in South Korea for a cash consideration of $2.1M. The company has been distributing XP’s products since 2008 and, although a niche player, South Korea is an interesting market for industrial electronics.
Going forward the management have suggested that they may look to make further acquisitions and they have also stated that whole the global economic outlook remains uncertain, the second half of the year has started well and they are encouraged by the order intake and strong backlog. They therefore expect to be able to continue to growth revenues in the second half of the year as designs won last year enter their production phase.
The bulk of the group’s revenues are earned in USD so the change in the USD to GBP exchange rate has a significant effect on revenues. The majority of expenses are also in US dollars, however, so the impact at the profit level is much less. The impact of the dollar changes during the period was to increase profits by £700K with the Euro exchange impact on profits being -£300K.
After an 8% increase in the dividends in the first half of the year, at the current share price, the shares yield 3.9% which increases to 4% on the full year consensus forecast. The predicted PE ratio for the full year stands at 15.3. At the period end, the net is £400K compared to a net cash position of £3.8M at the end of last year, although the net debt position as this point of last year was £1.5M.
Overall then, this half year was steady rather than impressive. Profits fell but this was only due to an increased tax bill and net tangible assets grew during the period. Operational cash flow also fell year on year, but again this was due to an increase in receivables and the underlying cash inflow improved. There is still a decent amount of free cash but this no longer seems to be covering the dividend and the group was left with hardly any cash left after the half year finished. Operationally, the medical market continued to improve and the technical market made a bit of a recovery but sales to industrial applications showed some softening. The management have also stated that orders from North America have softened somewhat compared to previously. Overall though, orders are up and the second half of the year has apparently started well and with the Vietnam factory expected to contribute to margins during the period as opposed to being a drag, the outlook looks fairly decent.
There is a good looking dividend yield here but it doesn’t look that well covered. This is a tricky one, I will probably hold fire here but perhaps look to enter on weakness.
The share price is a bit choppy but the trend seems to be generally upwards.
XP Power has now released an update covering trading in Q3. The group traded in line with board expectations during the quarter with revenues in the year to date up by 9% to £81.7M which was aided by favourable currency movements. There has been a continued strong performance across the European market but this was offset by weaker order intake in North America. Orders at the end of September were 2% higher than in the previous year but on a constant currency basis they were down 3%. Factory loading continued to be strong and this high utilisation in conjunction with the ramp up of power converter production at the Vietnam facility produced a favourable margin impact. At the end of the quarter net cash was £1.2M compared to £1.3M at the start of the year.
An 8% increase in the dividend to date means that the shares trade on an annual dividend yield of 4.3% which seems pretty decent. In all then, it does sound as though the slow-down in US orders is adversely affecting the group so I am not sure this is the right time to purchase the stock.
On the 25th November the group announced the acquisition of EMCO High Voltage, a manufacturer of high voltage power modules. A total consideration of £7.8M was paid in cash on completion which was funded through a new debt facility. The business, based in Northern California with manufacturing operations in Nevada, supplies the industrial and medical sectors with a broad range of standard, modified and custom high voltage products. As well as a product offering suitable for an array of applications used by some of the existing customer base, EMCO will bring a number of new customers to the group. Last year it recorded sales of £5.1M and it is expected to be earnings enhancing in 2016.
On the 17th December the group announced that Polly Williams will join the board as a non-executive director. Polly is a former partner at KPMG and is currently a non-executive director at Jupiter Fund Management, TSB Group and Daiwa Capital Markets Europe.
On the 8th January the group released a trading update for Q4 2015 where the performance was in line with board expectations. Revenues for the year as a whole were £109.5M and 8% ahead of those of last year, although just 4% ahead on a constant currency basis. Order intake for the period was £110.4M, an increase of 1% on a constant currency basis. The integration of EMCO is proceeding well and the sales team are already identifying new customer opportunities for their high voltage modules and orders for EMCO products from existing customers were strong in December.
Order intake in Q4 from North America of $22.2M (excluding EMCO) was more encouraging than the $17.3M experienced in Q3 and the total group order intake in Q4 of £30M is also encouraging. Following the EMCO acquisition, the group’s net debt stood at £3.5M compared to a net cash position of £1.3M at the end of last year. The Q4 dividend will be announced at the time of the final results but isn’t expected to be less than 23p per share which represents a 7% increase in the total dividend and a current yield of 4.3%.
Going forward, the board are encouraged by the stronger order intake in Q4 and by the progress of the integration of EMCO. Despite the mixed global economic picture, therefore, they enter 2016 with positive momentum and expect that they should be able to show further modest revenue growth during the year.
Overall then, this is not a bad update actually and the yield looks useful so I might be tempted to make a purchase.