XP Power has now released its interim results for the year ending 2016.
Revenues increased when compared to last year due to a £3.9M growth in North American revenue with EMCO contributing a £3.1M increase, a £1.1M increase in European revenue and a £1.1M growth in Asian revenues. Inventory costs were up £1M and other cost of sales increased by £2.5M to give a gross profit £2.9M above that of last time. Amortisation and depreciation showed modest increases, as did R&D expenses and with other operating costs increasing by £2.1M reflecting the strengthening dollar and contribution from the acquisition, the operating profit was just £300K up. Tax costs were down somewhat but more profit was attributable to non-controlling interests so the profit for equity holders came in at £9.8M, a growth of £200K year on year.
When compared to the end point of last year, total assets increased by £14.7M driven by a £4.9M growth in inventories, a £3.8M increase in trade receivables, a £2.3M growth in goodwill, a £1.8M growth in property, plant & equipment and a £1.4M increase in intangible assets. Total liabilities also increased during the period due to a £3.2M growth in borrowings and a £1.1M increase in current tax liabilities. The end result is a net tangible asset level of £46.6M, an increase of £5.7M over the past six months.
Before movements in working capital, cash profits increased by £3.7M to £18M. There was a cash outflow from working capital with an increase in inventories and receivables and after tax payments fell by £600K the net cash from operations was £8.2M, a decline of £300K year on year. The group spent £2M on R&D and £1.2M on fixed tangible assets to give a free cash flow of £4.9M. This did not cover the £7.5M paid out in dividends and the group repaid £1.2M of borrowings to give a cash outflow for the period of £3.7M and a cash level of £1.8M at the period-end.
Order intake of £61.6M was up 9% (4% on a constant currency). Compared to the same period last year, Asia increased by 5%, Europe increased by 1% and North America increased by 17% driven by a strong US dollar and orders of £4M from EMCO.
Industrial revenues increased by 20% to £28.8M driven by a strong performance in Europe and some recovery after the weakness seen in the industrial sector in North America last year. The technology sector grew by 11% compared to the first half of last year to £14M driven by semiconductor manufacturing and broadcast customers. Revenues from healthcare were up just 1% to £17.5M although the board expect growth in healthcare to improve over the medium term as new healthcare programmes enter the production stage.
Last year the group were able to raise their Euro pricing as the currency weakened against the dollar, on which the input costs are based, while still taking advantage of the euro forex hedges. This year they had the benefit of the previously raised prices but not the gains from the hedging programme. Revenue from own design products was £43.4M, up 20% year on year.
The operating profit in the North American business was £10.4M, a growth of £3M year on year; the operating profit in the European business was £6M, an increase of £2.2M on the first half of last year; and the operating profit in Asia was £1.1M compared to a break-even position in the first half of 2015.
The group enter the second half of the year with an order backlog of £50M compared to £48M at the year-end. The integration of the EMCO business has progressed well and in the period they received orders of £4M for EMCO products with £3.1M being shipped.
The group launched 27 new product families in the period compared to 13 in the first half of last year. This relatively high number of new product introductions was aided by the introduction of a new labelled product supplier to increase their offering of DC-DC converters. Examples of products released in the period include the ALM65 family and the XT16 three phase input version of the configurable fleXPower range.
The ALM65 family is an external 65 Watt AC-DC power converter that complies with the latest Level VI energy efficient standard which was only introduced in February 2016. This new standard ensures that much less power is consumed when the end unit is switched off or not connected, and seeks to increase average efficiency to reduce waste power when the load is connected. The products also meet the latest medical standards so can be designed into healthcare applications.
The XT16 is an addition to the existing modular fleXPower series which can be configured into a bespoke solution for quick delivery of samples, prototypes and production, with up to 1,600 Watts of output power. The product can be populated with up to seven output modules chosen from 44 single output and 16 dual output modules ranging from 3.3V at 66W to 60V at 750W. Introduced in response to customer demand, the product is the first three phase input version they have introduced to the fleXPower family.
The group manufactured 550,000 power converters during the period with 140,000 of these being produced in the Vietnam facility (compared to 24,000 in the first half of last year). They expect the proportion of power converters produced in the country to increase as they transfer more products there.
About ¾ of the group’s revenues are invoiced in US dollars so the change in the USD/GBP exchange rate has a significant effect on reported revenue. As the majority of the cost of goods sold and operating expenses are also denominated in USD, however, the change in profit is relatively minor with the impact in H1 being to increase profits by £500K.
In January, Polly Williams joined the group as a non-executive director. She is a former partner at KPMG and is also a non-executive at Jupiter Fund Management, TSB and Daiwa Capital. John Dyson stepped down from the board following the AGM after many years of service.
The Brexit decision resulted in a significant weakening of Sterling against the US dollar and a degree of economic uncertainty. About 20% of the group’s revenues derive from UK customers but it is difficult to judge how the business in the UK will be affected in terms of whether there will be a low down or whether customers might actually benefit in export markets from the depreciation of Sterling. If current rates persist in the second half of the year, it will have a favourable translation effect on reported revenues but a slightly adverse effect on UK margins if they can’t pass on price increases to the 67% of UK customers currently invoiced in Sterling.
While the global economic outlook remains uncertain and exchange rates are volatile, the board are encouraged by the strong order backlog. This, together with new programme wins gives them confidence that they can grow revenue in the second half of the year as designs won in 2015 enter their production phase.
At the period-end the net debt stood at £6M compared to £3.7M at the end of last year and £400K at the same point in 2015. At the current share price the shares trade on a PE ratio of 15.5 which falls to 14.9 on the full year forecast. After a 7% increase in the first half dividend, the shares are yielding 4.3% which increases to 4.5% on the full year forecast.
Overall then this has been a steady half year period for the group. Profits were up modestly but net assets showed a stronger increase. The operating cash flow did fall and the free cash flow was not enough to cover the dividend but this was mainly as a result of an increase in inventories and cash profits grew.
The industrial and technology markets performed well but the healthcare market was flat, although new programmes are coming on line in the second half of the year. The order back log is up slightly and although the economic outlook is uncertain, the group don’t seem to be that exposed to Brexit. The forward PE of 14.9 is rather pricey but the dividend yield of 4.5% is pretty good and I am happy to hold after this steady (nicely boring!) update.
On the 26th September the group announced that Chairman James Peters sold 120,000 shares at a value of just over £2M. He remains interested in just under 2M shares but this is a substantial sale.
On the 7th October the group released a trading update for Q3 where they stated that they continue to trade in line with board expectations. Revenues for the first nine months of the year increased by 13% to £92.6M and on a constant currency basis they were up 5%. Orders for the period increased by 19% to £95.8M (constant currency 11% increase). Q3 order intake was boosted as customer orders expected to be placed in Q4 were pulled forward into September. The momentum in the order intake is encouraging as they are starting to see their North American markets return to growth.
Net debt was £2.2M at the end of the period compared to £6M at the end of the first half of the year and a dividend of 16p will be paid which represents an annual yield of 4% at the current share price. Going forward, despite the challenging
macroeconomic backdrop, the board are reassured by the momentum in their order intake and expect trading to be in line with expectations for the full year.
They remain encouraged by new design wins and believe the group is continuing to take market share as its portfolio of power technology products is increasingly designed in to new equipment by their customers. These design wins will translate to orders as these projects move to production phase over the coming years. Overall this seems to be steady as she goes and I continue to hold.
On the 13th January the group released a trading update covering Q4. They had a strong finish to the year in line with board expectations as the acceleration in order intake reported in Q3 fed through to robust revenue growth this quarter. The momentum in order intake continued to strengthen in Q and was £37.1M compared to £35M in Q3 and £30M in Q4 last year. Revenues in the quarter were £37.1M compared to £32.3M in Q3 and £27.8M in Q4 2015. Net cash at the end of the quarter was £3.6M compared to a net debt position of £3.7M at the end of last year.
Going forward, the board are encouraged by the strong order intake they have experienced in the second half of the year. They enter 2017 with positive momentum and expect that they should be able to show further growth in revenues in 2017. This all looks good to me, I continued to hold.