XP Power Share Blog – Interim Results Year Ending 2018

XP Power has now released their interim results for the year ending 2018.

Overall revenues increased year on year as a £600K fall in Asian revenue was more than offset by a £13.3M growth in North American revenue and a £300K increase in European revenue. The purchase of inventories declined by £7.6M but this was more than offset by a £12M change in inventories and a £2.7M increase in other cost of sales to give a gross profit £5.9M higher. Amortisation was up £1.1M, depreciation increased by £200K and R&D expenses grew by £300K which meant that the operating profit rose by £4.4M. Finance costs were up £300K and tax expenses increased by £600K to give a profit for the period of £14.6M, a growth of £3.7M year on year.

When compared to the end point of last year, total assets increased by £50.9M, driven by a £16M growth in goodwill, a £12.8M increase in inventories, a £12.4M increase in intangible assets, a £6.2M growth in trade receivables and a £5.4M increase in property, plant and equipment, partially offset by a £2.9M decrease in cash. Total liabilities also increased during the period due to a £34.6M increase in borrowings and a £6.6M growth in payables. The end result was a net tangible asset level of £33.1M, a decline of £19.9M over the past six months.

Before movements in working capital, cash profits increased by £8.1M. There was a cash outflow from working capital and despite tax payments falling by £1M, the net cash from operations was £13M, a decline of £3.4M year on year. The group spent £2.8M on capex and £2.8M on R&D along with £35.6M on the acquisition to give a cash outflow of £28.1M. The group then took out a net £33.8M of net loans which helped pay for £9M of dividend payments and give a cash outflow of £2.8M for the half year and a cash level of £12.1M at the period-end.

Overall the reported order intake, revenues and earnings were comfortably ahead of the first half of last year, offsetting the impact of sterling appreciation. The group benefited from the continued momentum in the capital equipment markets and, significantly, new design wins entering their production phase. Order intake of £101.4M was 9% up on last time (10% like for like at constant currency)

The operating profit in the European business was £8.2M, a growth of £500K year on year with revenues up 11% The operating profit in the North American business was £16M, an increase of £1.5M when compared to the first half of last year. Revenues were up 44%, boosted by the acquisitions, with like for like revenues up 22%. This reflects the strong performance of the semiconductor equipment market. The operating profit in the Asian business was £1.8M, an increase of £700K when compared to the first half of 2017 with revenues increasing by just 1%
The group has felt the effect of strengthening pound against the dollar and the impact of changes in the key exchange rates led to a £1.6M reduction in pre-tax profit.

All sectors remain buoyant suggesting that the broad recovery seen in capital equipment markets last year is continuing. Revenues from healthcare customers increased by 14%, revenues from industrial customers grew by 10%, revenues from technology customers were up 13% and revenues from semiconductor manufacturer customers more than doubled with organic revenues up 68%. The robust organic growth rate was underpinned by a number of new programme wins by the engineering solutions group entering into production, expanding the market share, which remains relatively low.

The group are now seeing some shortages of components together with component price inflation. To date, the safety stocks have largely insulated them and their customers from these shortages but this caused a minor margin decline in the period which was partially offset by the strengthening sterling. The group are building a sufficient margin of safety stock on critical lines wherever possible

In May the group acquired Glassman High Voltage, a company that is a designer and manufacturer of high voltage, high power, power supplies. In addition, the acquisition also includes the purchase of the European sales business. The group made the acquisition because they share several customers and while there is no direct overlap in product lines, the power supply solutions of the two companies are complementary. The total consideration, paid in cash, was £35.8M and it generated goodwill of £15.5M. In the month or so after acquisition, the business generated a net profit of £300K. Last year’s Comdel acquisition is performing in line with expectations and made of net profit of £1.7M in the period.

In October last year the group started construction on a second factory at their existing site in Vietnam. They expect construction to be completed by Q4 this year with production scheduled to come on stream in H1 2019. It is estimated that the existing Asian manufacturing facilities have the capacity to produce $170M of end revenue of their own manufactured products. The second facility in Vietnam will add an additional capability of around $130M of revenue. It is estimated that the cost of the building and the initial equipment set will be around $6.5M, of which $1.5M has been incurred to date.

Going forward, while the board remain conscious of potential risks arising from component cost inflation and macroeconomic challenges, their strong order book (£85.5M compared to £80.3M last time) and design wins over recent years entering production, means that they anticipate the group’s performance over the full year will be in line with existing expectations.

At the end of the period the group had a net debt position of £46.5M compared to £8M at the same point of last year. After a 6% increase in the interim dividend the shares are yielding 2.2% which increases to 2.3% on the full year consensus forecast. At the current share price the shares are trading on a PE ratio of 24.6 which falls to 20.1 on the full year forecast.

Overall then this was a fairly decent result for the group. Profits were up, although the net tangible asset level deteriorated due to the acquisition. The operating cash flow also fell due to the stock build but cash profits were up. All businesses showed growth and all sectors remained buoyant with the semiconductor market being particularly strong. There are risks, such as the cost price inflation issue and the large acquisition along with the cyclicality of the markets; and the shares are rather expensive with a forward PE ratio of 20.1 and yield of 2.3% but I continue to hold for now.

On the 14th January the group released a trading update covering Q4.  They had a good finish to the year with trading in the full year in line with board expectations.  All regions and sectors recorded growth in the year.  Their industrial, healthcare and technology markets reported healthy demand across the year and Q4 but the impact of the weakness in the semiconductor manufacturing equipment sector meant that both total order intake and revenues in Q4 were lower than in Q3.

Order intake was £45.1M, 4% below that of Q4 2017 and 6% lower at constant currency.  This resulted in order intake for the full year of £198.4M, an increase of 8% or 12% at constant currency.  On a like for like basis, order intake was up just 1%.  Revenue in Q4 was 14% ahead of Q4 last year and revenue for the year as a whole increased by 17%.  On a like for like basis it was up 7%.

The trading performance of Glassman was in line with the pre-acquisition expectations, with orders and revenues for the seven months of £7.3M.  Integration is proceeding as planned and the sales team is already finding new opportunities for these products.  Net debt at the year-end was £52.5M compared to £10.1M at the end of last year.

Going forward, while the group is not immune from macroeconomic conditions, they are encouraged by their ongoing new design wins and health order book.  On this basis, and with the benefit of the Glassman acquisition, they expect further revenue growth in 2019.  This really doesn’t say much when you think about it!

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