XP Power have now released their final results for the year ended 2018.
Revenues increased when compared to last year due to a £17.7M growth in semiconductor revenue, a £5.6M increase in industrial revenue, a £3.2M growth in technology revenue and a £1.8M increase in healthcare revenue. Cost of sales increased by £13.6M to give a gross profit £14.7M higher. Amortisation and depreciation was up £3.2M, distribution and marketing costs increased by £3.8M and R&D expense grew by £2.6M but admin costs were down £1.7M to give an operating profit £6.8M above last time. Finance costs increased by £1.4M and tax charges grew by £3.6M which gave a profit for the year of £30.2M, a growth of £1.9M year on year.
When compared to the end point of last year, total assets increased by £62.7M driven by a £20.1M growth in development costs, an £18.7M increase in inventories, a £13.7M growth in goodwill, a £9.2M increase in trade receivables and an £8.2M growth in property, plant and equipment partially offset by a £3.5M decline in cash and a £2.1M decrease in corporate tax recoverable. Total liabilities also increased due to a £39.5M growth in bank loans. The end result was a net tangible asset level of £39.7M, a decline of £13.3M over the past year.
Before movements in working capital, cash profits increased by £17M to £51.4M. There was a cash outflow from working capital and despite a £1.3M increase in interest payments being more than offset by a £2M decline in tax payments, the net cash from operations came in at £25.2M, a decline of £4.3M year on year. The group spent £7.9M on property, plant and equipment, £6.2M on R&D and £900K on software along with £35.5M on acquisitions to give a cash outflow of £25.1M before financing. The group brought in a net £36M from new borrowings in order to pay the £15.3M of dividends to give a cash outflow of £4.2M for the year and a cash level of £11.5M at the year-end.
The profit in the European division was £15.9M, a growth of £1.3M year on year on revenues that were up 6%. All sectors grew but healthcare showed the strongest gains due to a number of larger medical programmes entering production from some of their bigger customers. The semiconductor equipment manufacturing business in Europe is currently insignificant. Order intake increaed by 5%.
The profit in the American division was £40.8M, an increase of £5.4M when compared to last year. Revenues were up 31% or 13% on a like for like basis. This division particularly benefited from the growth in the semiconductor equipment manufacturing sector, but all markets grew year on year. Order intake increased by 14% but was up only 2% on a like for like basis. Comdel had a very strong order intake in Q4 2017 as semiconductor manufacturers placed orders for delivery throughout the year.
The Section 301 tariffs which the US has imposed on Chinese sourced products has a mixed impact on the group. A 10% tariff was imposed on power converters imported from China where the group has a manufacturing facility. There are proposals to increase this to 25%. Where possible they have been recovering some of these tariffs from customers but the facility in Vietnam has presented an opportunity over many competitors who manufacture largely in China as Vietnam is now yet caught by the new tariffs. They have been moving their lower power products from China to Vietnam and these tariffs have caused them to accelerate this process.
The profit in the Asian division was £4.9M a growth of £400K when compared to 2017 on revenues that increased by 5% with the strongest growth in industrial and declined in healthcare and technology as programmes went end of life. Order intake in the region increased by 13%.
The first half of the year saw very good growth in the semiconductor equipment manufacturing sector which then softened in the second half of the year, and in particular in Q4. In contrast, the industrial, healthcare and technology sectors all showed growth in the second half of the year compared to the first half and remained robust in Q4.
Revenues from industrial customers grew by 7% as the recovery in the sector continued into 2018. Revenues from the semiconductor manufacturing equipment sector grew by 60%. In the first half they benefited from a cyclical upswing, combined with strong market share gains and revenues from Comdel and Glassman as their expansion into high voltage and high power products made them an attractive supplier to the industry. The new products they have allow them to service considerable more opportunities in this sector. As widely reported, the sector slowed significantly in the second half of the year, however, with impacted Q4 order intake and revenues.
Revenues from healthcare customers grew by 4%. This remains an attractive market for the group. Revenues from technology customers grew by 19% and contains a number of large project with shorter lead times than typical in the other sectors the group are involved in.
Their design win pipeline was strong in 2018, which bodes well for continued market share and revenue growth. They also continued to move their product portfolio up to higher power and technically more complex applications, and to expand the number of design wins with higher engineering solutions content.
On a like for like basis, order intake increased by 5%. They grew across all regions and sectors but they did see a slowdown in the semiconductor manufacturing sector in Q4.
During the first half of the year the group started to see significant tightening of the supply chain for certain electronic components which resulted in increased lead times and component cost inflation. In response they secured supplies of critical components at prices beyond their standard costs in order to ensure they could continue to meet their lead times to customers. Lead times for certain components increased dramatically, in some cases moving from 12 weeks to a year which meant they had to increase their safety inventories significantly. The higher prices they had to pay were a drag on margins in the second half of the year but were offset by other cost savings and a favourable product mix.
In May the group acquired Glassman High Voltage, a designer and manufacturer of high voltage power converters. The total consideration of £35.7M was paid in cash. The group share several customers with the business and while there is no direct overlap in product lines, the power supply solutions are highly complementary. Glassman’s products and engineering capabilities have enhanced the group’s ability to implement its strategy of winning a greater share of business from its largest customers by achieving a wider vertical penetration of key accounts. The business is being integrated into the group well.
The group plant to spend £10M on capex next year which is double that of 2018. This is due to the completion of the new Vietnam site and an investment in upgrading their ERP system.
Going forward, the new financial year has begun against a backdrop of ongoing macroeconomic uncertainty. While they are not immune from the impact of external events, they are encouraged by our start to 2019 in terms of order intake and their healthy order book. On that basis, and with the benefit of the Glassman acquisition, the board expect further revenue growth in 2019, but this will be weighted to the second half of the year.
At the current share price the shares are trading on a PE ratio of 14.5 which falls to 12.2 on next year’s forecast. After a 9% increase in the dividend, the shares are yielding 3.8% which increases to 3.9% on next year’s forecast. At the year-end the group had a net debt position of £52M compared to £9M at the end of last year with the increase due to the Glassman acquisition and higher inventory levels.
Overall then, this has been a decent year but not without some challenges. Profits increased but net tangible assets reduced due to the acquisition. The operating cash flow also fell with no free cash generated after the acquisition. This was due to the increase in working capital due to the longer lead times which should relent somewhat this year. All regions saw growth, although there were projects in healthcare and technology in Asia coming to their end. There was also a slowdown in semiconductor orders in Q4 which doesn’t bode well for the start of the coming year, and the board have stated it is likely to be second half weighted which is always a risk. The shares are starting to look better value, though, with a forward PE of 12.2 and yield of 3.9% but I am not sure this is enough to cover the risks, and I would like to see debt come down too.