XP Power Share Blog – Final Results Year Ended 2014

XP Power is listed on the London stock exchange and is incorporated in Singapore.  They make power converters that takes electrical mains supply from the grid and converts it into the correct form of electricity to power their customers’ equipment in applications in the industrial, healthcare and technology industries.  In addition, the power converter will prevent electrical noise from the mains interfering with the end equipment and will also prevent the end equipment transmitting noise into the mains supply along with reducing the production and running costs of their customers’ equipment.

The group apparently deals with 95% of the S&P 500’s healthcare equipment manufacturers along with 73% of the industrial equipment manufacturers and 69% of the technology equipment manufacturers.  The board estimates that they currently have an 8.3% share of the North American market, an 11.1% of the European market and just 1.2% of the Asian market.

The time from identification of a customer programme can be very long (between 18 to 30 months) but once the product is designed into their customers’ equipment they have an ongoing revenue annuity, typically for around seven years but this can be longer or shorter depending on the industry and application.

It has now released its final results for the year ended 2014.

XPincome

Revenues were flat year on year reflecting a weakness in the US dollar (constant currency revenues were up 5%) as a decline in sales to Europe was counteracted by increases to North America and Asia.  Cost of sales declined, however, it seems due to changes in inventories which gave a gross profit £500K ahead of last year.  Distributing and marketing costs also fell somewhat, also partly due to weakness in the US dollar against Sterling, but a small decline in interest expense was offset by a modest increase in tax so the profit for the year stood at £19.4M, an increase of £1.2M year on year.

XPassets

When compared to the end point of last year, total assets increased by £7.6M driven by a £4.8M increase in inventories, a £1.4M growth in development costs and a £1.3M increase in plant and equipment, partially offset by a £1.2M decline in cash.  Liabilities fell during the year as a £6.3M fall in loans and borrowings was partially offset by a £1.7M increase in payables.  The end result is a net tangible asset level of £39.8M, a decent looking £9.5M increase year on year.  There is also £5.2M worth of operating leases off the balance sheet, but this doesn’t seem excessive.

XPcash

Before movements in working capital, cash profits increased by £3.8M to £29.4M.  After a large increase in inventories was partially offset by a lower amount of tax paid, however, the net cash inflow from operations was £21.8M, an increase of £1.6M when compared to last year.  The group then spent £2.9M on R&D (the bits that weren’t included in operational cash flow) and £2.9M on fixed assets so that the free cash flow stood at an impressive £16M.  The group used £7.3M to pay off the loans and £11M was given to shareholders in dividends which meant at the end of the year, the cash level stood at £1.3M.

Overall the operating margin improved from 23% last year to 24.2% in 2014. The group started production of the first complete power converters in the Vietnam factory, providing additional manufacturing capacity at lower cost than the existing Chinese facility.  They have also implemented a new CRM system to enhance collaborative working and provide better customer service and knowledge to the business.

The profit at the European business was £7.6M, an increase of £200K year on year.  Some European markets have been challenging, particularly in those where the group already have a high market share such as the UK.  Despite the challenging economic conditions in Germany and Southern Europe, they saw revenue growth in these areas due to an increase in market share.  A direct sales presence has been established in Israel where good medium term opportunities have been seen.

The profit at the North American business was £13.6M, a growth of £300K when compared to last year.  It has shown some clear momentum driven by strong design wins in larger blue chip customers.  The outlook is encouraging and the group will be expanding their sales engineering resources over the next year.  The profit at the Asian business was £1.7M, an increase of £800K year on year as the division performed well, being able to replace a large programme that went end of life last year.  A direct sales presence has been added in Japan where the group has already had some wins against strong local competition.

As far as sectors are concerned, industrial revenues increased by 3.4% to £49.1M, healthcare increased by 2.6% to £31M but technology declined by 10.3% to £21M.  The improvement in industrial and healthcare sales is principally due to market share growth as new programmes have entered into production.  In industrial, good progress has been seen in 3D printing, test and measurement and industrial printing applications.  The healthcare segment continues to strengthen and the group expect to see higher growth rates in the medium term as they are now approved vendors at all the key players in this market, yet still have a relatively small share of their available business.  Technology continues to be the most cyclical and challenging segment.  The semiconductor equipment manufacturers, where XP has a strong customer base, are highly cyclical.  They have also seen a decline in some other technology programmes which the group are working to replace with new business.

During the year the group worked with a customer who supplies communication equipment, serving areas such as police, fire, rescue and other emergency services markets.  They came to them with a requirement for a DC/DC power converter.  They had previously been working with another company which was designing them a custom power converter for their application but after a while they discovered the specification was too onerous for them to achieve.  The solution had to meet the stringent requirements for conducted and radiated emissions and immunity, and a very tough environmental requirement.  In addition, even though the maximum power output was only 15 Watts, it had to fit inside a relatively small space that the customer had allowed for the power converter in their system.

The group’s design and applications engineers came up with a solution based on one of their standard filters and DC/DC modules.  The parts are designed in such a way that they use the enclosure in which they are placed as a heat sink.  This means that they can be used within small enclosures and radiate a large proportion of the unwanted heat to the outside environment.  The tougher part of the design was the required EMC performance.  As the end application was a communications system, the limits that needed to be met were very low, allowing the system to be used in harsh, noisy environments.  This combined with the space constraints did not allow for ideal component placement but using their own facilities, the group was able to perfect the circuit before performing the final tests and gaining approval in a third party test house.

A manufacturer of building control systems based in Europe uses the group’s standard ECE05 encapsulated AC/DC power module in a wall mounted control panel.  The ECE05 was selected for its high efficiency and very small size, utilising the benefits of low heat dissipation, low profile and small footprint to minimise the internal ambient temperature and maximise the available space for the end application within the enclosure.  Due to the customer’s high quantity expectations of the next development, which offers a reduced feature set at a lower price, cost was a key driver for all system elements including the power converter.  The group was able to compromise certain spec elements of the standard product while maintaining the key efficiency size benefits, adopting a simplified feedback and control systems for a modified version of the ECE05 and removing the case and encapsulation.  The simplified control system significantly reduced the component count and combined with the removal of the case and encapsulation, realised a modified standard version at a significantly lower cost.

The ultra-high efficiency products are also inherently more reliable.  Once the power converter gets to a level of efficiency that it is producing very little waste energy as heat, it no longer needs a mechanical fan to cool it, which is the most unreliable part of the unit.  In addition, as the power converter runs cooler the electronic components which are sensitive to heat, such as electrolytic capacitors, have longer lifetimes.  This is of particular benefit for products that are designed into critical applications in the healthcare and high end industrial sectors where product failure and downtime are not acceptable.  The additional benefit of dispensing with fan cooling is that the system does not require vents to expel the waste heat so can be sealed to prevent ingress of liquids and other material that could affect its reliability.

The group have consistently raised the power level at which their products can operate without the need for fan cooling.  While it is comparatively straightforward to design products in the 100 Watt power range that do not require fan cooling the challenges become much greater as the power levels increase.  In the first half of the year the group released the CCB200 which is a cost efficient power converter which can deliver 200 Watts of power without the need for fan cooling.  This unit can deliver this level of power at high ambient temperatures right across the input range (up to 70 degrees C).  Since then, the CCL400 has been released that can deliver 400 Watts of power without the need for a fan.  These two products have been well received by customers and the design win pipeline for both is strong.

As with any business there are a number of risks.  One of the main one seems to be competition.  The directors believe that the development of new technologies could give rise to significant new competition to the group which may have a material effect on its business.  At the lower end of the target market, the barriers to entry are low and there is a risk that competition could quickly increase particularly from emerging low cost manufacturers in Asia.

There were a number of board room changes during the year.  Peter Bucher joined as non-executive director and he has experience in the power converter industry.  Terry Twigger joined the board at the start of 2015.  He has previous experience as CEO of Meggitt.  The founder of the group is still part of the board and is currently chairman and I have to say it is very refreshing to see such sensible remuneration for the directors.  They are well paid but there does not seem to be the excesses with regards to share options and the like seen at some other companies.

The provision for the deferred consideration on the balance sheet relates to the acquisition of the final 16% of Powersolve Electronics in 2017.  The final amount payable depends on the future performance of the business but it is estimated at £1.7M.  If Powersolve’s future earnings change by 10% year on year, the deferred consideration will be affected by £100K.

The group has an annual working capital facility of up to $15M with the Bank of Scotland.  The facility reduces to $12.5M from 2015 and $7.5M from July 2015 and has an interest rate of LIBOR+1.75%. The group is slightly susceptible to exchange rates.  A 6% weakening of the US dollar against Sterling would reduce profit by £200K and a 5% strengthening of the Euro against sterling would reduce profits by £400K – this is definitely the right way round for the group at the moment.

While the global economic outlook looks mixed in the year ahead, the board believe that they can grow revenues as the new designs won in 2014 and prior years enter production.  The North American and Asian businesses are showing encouraging momentum.  They also plan to invest in additional sales and engineering resources in North America during next year to help drive further growth, and have hinted they may invest in bolt on acquisitions to further broaden their product offering and engineering capabilities.

At the current share price the shares trade on a PE ratio of 16.1 which reduces to 15.3 on next year’s consensus forecast.  After an 11% increase in the total dividend, the shares currently yield 3.7%, increasing to a decent 4% on next year’s forecast.   The dividend is paid quarterly which is a nice change in a company of this size.  The net cash position at the year-end was £1.3M compared to a net debt position of £3.5M this time last year.

Overall then, this seems like an interesting company that has produced a good set of results.  The group has good earnings visibility given the length of time its components are used in customer products but already have fairly high market shares in Western markets but Asia seems to be an area for potential growth with a lower market share in that region.  It is worth noting too that there could be some heavy competition in the areas that XP operate.  At the lower end, there is a low barrier to entry and I would have thought heavy competition on price so it is with the innovations around efficiency of their products such as the removal of the fan that differentiates the company.

This year, profits improved year on year, as did net assets and operational cash flow.  Indeed there was plenty of free cash and the group only had an outflow of £2.4M despite paying back loans of £7.3M.  Trading has been decent across all regions and industrial and healthcare improved which mitigated the continued falls in the technology market.  Going forward, the Vietnam factory should add to the low-cost credentials here and there is also a decent quarterly paid dividend to enjoy.  All in all, this looks like an interesting company to invest in.

 


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