XP Power has now released its final results for the year ended 2015.
Revenues increased when compared to last year as a £500K decline in industrial revenue was more than offset by a £5.8M growth in technology revenue and a £3.3M increase in healthcare revenue, although about half of this increase was due to favourable currency movements. Cost of sales also increased to give a gross profit £4.5M above that of last year. Amortisation and depreciation increased by £700K, distribution and marketing costs were up £700K, partly as a result of Chinese wage appreciation and start-up costs at the Vietnamese facility. Admin costs grew by £500K and R&D expenses increased by £1.5M which meant that the operating profit grew by £1.1M. After the tax expense increased by £700K, mainly relating to deferred tax increases, the profit for the year came in at £19.9M, an increase of £400K year on year.
When compared to the end point of last year, total assets increased by £15.8M driven by a £5.7M growth in goodwill, a £3.5M increase in inventories, a £2M increase in development costs, a £1.5M growth in trade receivables and a £1.7M increase in property, plant & equipment. Liabilities also increased as an £8M growth in bank loans and a £1.4M increase in deferred tax liabilities was partially offset by a £1.9M decline in the overdraft. The end result is a net tangible asset level of £40.9M, a growth of £1.1M year on year.
Before movements in working capital, cash profits increased by £800K to £30.1M. There was a cash outflow through working capital, however, and tax was £1.1M above that of last year so that the net cash from operations was £20.9M, a decline of £800K year on year. The group spent £2.5M on property, plant & equipment; £2.9M on R&D; and £8.3M on acquisitions to give a cash flow of £7.4M before financing. This did not cover the £12M paid out in dividends, though, and the group took out £8M in new borrowings to give a cash flow for the year of £3.2M and a cash level of £4.3M at the year-end.
The year was one of significant progress, despite challenging economic conditions for the industrial electronics market. Apparently the market declined during the year so it seems XP have probably increased market share.
The profit in the European division was £6.7M, a decline of £900K year on year but revenues in the region grew by 7% having declined in the previous year, despite the translational effect of a weak Euro. The industrial business in Europe grew by 6% but healthcare performed better with new customer programmes driving growth of 11%.
The profit in the North American division was £14.6M, a growth of £1M when compared to last year. Revenues in the region only increased by 1%, however, and this was due to the EMCO acquisition with no organic revenue growth recorded. This weakness in revenue came entirely from the industrial sector which declined 18%, although this was compensated for by a 31% growth in the technology sector which shows that after a number of challenging years the technology sector in the region has bounced back strongly. Order intake during Q3 was noticeably weak at only $17.3M but they rebounded to $23.6M in Q4, giving the board greater confidence for 2016.
The profit in the Asian division was £1.4M, a fall of £300K when compared to 2014. Revenues continued to grow, increasing by 9%, despite the slow-down in China. The customers driving this increase generally have demand for their end products outside of the emerging markets and the region showed a similar pattern to North America with the technology and healthcare sectors demonstrating much stronger growth that industrial. Healthcare revenues showed very strong growth of 24%, technology revenues were up 16% and industrial revenues were flat.
The group consider that their transition from a sales distribution company, through the addition of a design capability, to designer and manufacturer is now complete and revenues from their own-designed products set a new record of £74.6M during the year representing 68% of total sales and further growth in that area is expected in 2016 too. The group have established their position with their standard offering products but now see opportunities for their larger customers to engage in custom designs and have deployed more of their engineering resource into these areas.
New product releases included the GCS265 and GCS350 series which extend their popular GCS180 and GCS250 product families upwards in power. These new ranges offer high efficiency at a lower price point and have apparently been well received by customers.
During the year the group produced 1.4M power converters compared to 1.3M last year. Production volumes of magnetics windings at the Vietnam facility have continued to ramp-up and during the year they produced 4.3M windings compared to 3.6M in 2014. In Q4 2014, the started to produce the first pre-production samples of complete power converters in the country which has continued to build to 200K units during 2015. This enhances cost competitiveness as production costs in Vietnam are significantly lower than the existing facility in China and the Vietnam facility is now at break-even as the volumes of converters continue to build. It is unclear what the future is for the Chinese facility though.
Last year the group was accepted as a supplier to Digikey, an electronic components distributor, in addition to the existing arrangements with Premier Farnell and Newark. These are good channels to service smaller customers and to gain brand recognition and in 2015, the first full year of the Digikey arrangement, it provided excellent growth in this channel, enabling the group to reach more customers.
In this market there is always the potential for increased competition. The development of new technologies could give rise to new competition and 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. The group is also, of course, susceptible to a global economic downturn with the current outlook as it is.
The group’s working capital facility reduces each year. This year they renewed the facility to $12.5M from $15M in 2014. It steps down to $10M from the start of 2016 and then reduces to $7.5M from April 2016 and to $5M from July (Only £600K of the facility representing 7% was drawn down at the year-end). In November they entered into a new term loan with Bank of Scotland of £8M, though, to finance the EMCO acquisition. It is repayable in equal quarterly instalments of $1.7M starting in June 2016 and ending in December 2017. The loan is priced at LIBOR plus 0.95% which seems like a good rate to me. Net debt at the end of the year was £3.7M compared to a net cash position of £1.3M last year due to the acquisition.
In November the group acquired EMCO, a specialist in high voltage DC-DC modules, for a total consideration of £7.7M paid in cash. The business is based in Northern California with manufacturing operations in Nevada and supplies the industrial and healthcare sectors with a broad range of standard, modified and custom high voltage products. The group currently supplies AC-DC power converters to many customers that are also using these high voltage DC-DC converters and the group’s AC-DC converter may often be supplying the DC power to the high voltage modules in the customer’s system. Until now they have not had access to this high voltage technology and the acquisition opens up a significant growth opportunity in this nice market characterised by numerous small players.
In May the group acquired a 51% stake in their distributor in South Korea for a cash consideration of $2.1M. They also set up a sales office in Israel early on in the year. Typical design in-cycles from identification of an opportunity to realising the first revenue are around a year and a half but the group are already identifying good opportunities in that market. They continue to seek acquisition that enable them to expand their product portfolio and engineering capabilities.
At the start of the year, Terry Twigger joined as a non-executive director having previously been CEO at Meggitt. At the start of 2016, Polly Williams joined as a non-executive director. She is a chartered accountant, having been a former partner at KPMG and she holds a number of other non-executive directorships including at Jupiter Fund Management and TSB. Following these new appointments, after spending 16 years at the group, John Dyson will be stepping down at the AGM.
Going forward, while there are a number of economic headwinds with the potential to impact the business in 2016, notably slowing growth rates in China and North America, the board consider that they are well positioned in their marketplace. They have good momentum as their design pipeline continues to grow and order intake in Q4 was strong, with a healthy order book evident as they enter 2016. In addition, they are excited by the prospects of the new high voltage DC-DC line following the acquisition of EMCO which will provide additional revenues in 2016 so the combination of these factors gives the board confidence that they will see further revenue growth in the year to come.
At the current share price the shares trade on a PE ratio of 15 which falls to 14.6 on next year’s consensus forecast. After an 8% increase in the total dividend for the year, the shares currently yield 4.3% which increases to 4.5% on next year’s forecast.
Overall then, this has been a decent, steady year for the group. Profits increased modestly, net assets were up and although the operating cash flow declined, this was only due to working capital movements and higher tax payments with the cash profits growing and a good amount of free cash being generated. Operationally, curiously both Europe and Asia saw revenues increase and profits fall with the latter affected by the slowdown in China whereas in North America, the profits increased by revenues were down due to the slowdown in industrial production in the US.
This slowdown did affect orders in Q3 but they seem to have bounced back in Q4 so there is some momentum going into 2016. Hopefully the Q3 figure was the anomaly and not the Q4 one. The board flag up that barriers to entry are low at the bottom end of their market, presumably this is why they are moving into designing bespoke products for their customers, but the Vietnam factory also means they are competitive on price too. The EMCO acquisition looks good – I like companies who make acquisitions out of their cash flow rather than big loans and placings, and the board seem excited about prospects there. Going forward there are certainly some headwinds but with a forward PE of 14.6 and yield of 4.5% I think these shares offer decent value and I have made a small purchase.
On the 11th April the group released a trading update covering Q1. Group revenues were £28.2M, up 10% year on year and up 6% on a constant currency basis. Order intake in the quarter was £30.3M, up 9% on Q1 2015 and 4% on a constant currency basis. Reported net debt was £3.7M at the period-end which was the same as at the end of 2015 and after an 8% increase in the quarterly dividend the shares are yielding 4.1%. Overall, the group remains on track to grow in line with their expectations in 2016.