XP Power has now released their final results for the year ended 2016.
Revenues increased when compared to last year with an £11.2M rise in industrial revenue, a £5.3M growth in technology revenue and a £3.6M increase in healthcare revenue. Cost of sales also increased to give a gross profit £7.4M higher. Depreciation was up £200K along with rent and lease expenses with other distribution and marketing costs increasing by £4.2M. There was a £600K increase in amortisation charges but the R&D expense was down £500K to give an operating profit £2.4M higher. After the tax expense increased by £800K the profit for the year was £21.3M, a growth of £1.6M year on year.
Compared to the end point of last year total assets increased by £20M driven by a £4.3M growth in cash, a £4M increase in trade receivables, a £3.5M growth in inventories and a £3.2M increase in development costs. Total liabilities also increased during the year as a £2.5M decline in bank loans was more than offset by a £2.1M growth in current tax liabilities and a £1.5M increase in payables. The end result was a net tangible asset level of £55M, a growth of £12.8M year on year.
Before movements in working capital, cash profits increased by £7.7M to £37.8M. There was a cash outflow from working capital but tax payments fell by £600K to give a net cash from operations of £27.7M, a growth of £6.8M year on year. The group spent £2.6M on property, plant and equipment along with £4.2M on R&D which meant that the free cash flow was £21M. Of this, £3.7M was used to pay back borrowings and £12.9M paid out in dividends to leave a healthy cash flow of £4.4M and a cash level of £9.2M at the year-end.
While overall the market for industrial electronics remained challenging during the year, trading conditions improved in the second half and the group had some positive momentum in order intake and revenues. They have also delivered their highest ever level of own designed product which now represent 73% of the total and they expect this to increase again in 2017.
The European business contributed £11.6M, a growth of £4.9M year on year in challenging market conditions. The industrial, healthcare and technology sectors all grew in the region and the group gained increased traction with some of the bigger blue chip clients, which they expect to drive further European growth in 2017.
The North American business contributed £21.6M, an increase of £7M when compared to last year but it did benefit from incremental revenues from the acquisition of EMCO at the end of 2015. Without this, revenues would have been flat year on year. Order intake was strong in the second half of the year with $51.6M booked compared with $47M in the first half. The region now has the benefit of good momentum going into 2017 with some promising new programmes where they expect volumes to ramp up significantly during the year.
Technology held its own and the industrial sector rebounded to represent 35% of revenues in the region compared to 31% last year. Healthcare also performed well in absolute terms as a number of new programmes ramped up but it did not match the pace of the recovery seen in the industrial sector.
The Asian business contributed £3.5M, growth of £2.1M when compared to 2015. The customers driving this increase generally sell their end products outside of the emerging markets. Industrial and technical sectors showed good growth whilst healthcare remained flat year on year.
Production volumes of magnetics windings at the Vietnam facility have continued to ramp up and in 2016 they produced 4.9M windings compared to 4.3M in 2015. They have been actively transferring the lower power/lower complexity products from China to Vietnam to improve the cost position and free up capacity in China. Over the year they manufactured 377,700 power supplies in their Vietnam facility compared to 172,500 in 2015.
The group continue to make improvements in their manufacturing facilities where they are applying more lean process principles. Their internal yields continue to improve and they have redesigned some of their processors to reduce product lead times to provide improved customer service and reduced freight costs. They expect to derive cost benefits from their lean manufacturing initiatives as they trade through 2017.
Their longer term planning indicates that they will need additional manufacturing capacity in the first half of 2019. They have therefore allocated $1.5M of their capital budget in Q4 of 2017 to break ground on a second factory at the Vietnam site.
In the summer the group engaged with electronic components distributer Electrocomponents. With this appointment they now have a presence in three leading global high service level/online distribution channels, making their product more readily available to a larger number of small and medium sized customers. They are experiencing excellent growth through these channels, allowing their direct sales teams to concentrate on larger accounts.
The weakening of Sterling since the Brexit vote has obviously had a material effect on the presentation of the group’s results. About 75% of revenues are denominated in US dollars but the majority of cost of sales and a large proportion of operating expenses are also denominated in dollars which means that the gross margin percentage could be about 130 basis points lower.
In the UK business invoiced in sterling, which is about 13% of worldwide revenues, margins were reduced in the second half of the year as the associated product cost is denominated in dollars. They have therefore been raising prices as customers place new orders to compensate for this effect. Whilst no customer is ever happy with a price increase, the reasons for doing so are well understood and the group expect to recover a significant portion of their margin losses in the UK in 2017.
The board do not consider that the broader economic impacts of Brexit on their business will be material. Evidence to date is that some of the UK customers are benefiting from the weakening of sterling. The group’s products are made in Asia and are already imported into warehouses in Germany and the UK so they could ship their product destined for the EU directly to Germany or another appropriate location.
Going forward the group have made it clear that they are going to put more emphasis on growth through acquisitions which is a bit of a shame I think.
The group entered 2017 with a strong order backlog and despite the mixed global economic picture, they have established positive momentum in the new year. The further utilisation of lower cost production in Vietnam is giving them a competitive advantage and they will begin work on a second factory at the site towards the end of 2017 to address their future growth requirements.
At the current share price the shares trade on a PE ratio of 18.9 which falls to 17.7 on next year’s consensus forecast. After an 8% increase in the total dividend, the shares are yielding 3.4% which increases to 3.6% on next year’s forecast. At the year-end the group had a net cash position of £3.7M compared to a net debt position of £3.7M at the end of last year.
Overall then this has been another year of steady progress. Profits increased, net assets grew and the operating cash flow increased with plenty of free cash being generated. All regions saw profits rise but the North American performance was due to the prior acquisition and the underlying business was flat. Pleasingly the strong momentum from the second half of the year has continued into 2017 but this steady performance and net cash doesn’t come cheap with forward PE of 17.7 and yield of 3.6 pricing some of this in. Still, this is a good company and I am happy to continue holding.
On the 11th April the group announced a trading update covering Q1. Trading has been strong as the positive momentum from the second half of last year continued into this year. Revenue growth accelerated once again to £39.6M in the quarter, up 40% from those achieved a year ago, although there was some assistance from forex movements and on constant currency terms revenue was up 23%. Order intake was up 36% at constant currency to £47M. The group had a net cash position of £8.8M at the period-end compared to £3.7M at the year-end. Overall results are in line with expectations which is good so I continue to hold.
On the 20th June it was announced that several directors sold a lot of shares, equivalent to just over 3% of the company. Chairman James Peters sold 400,000 shares at a value of £9.6M. He retains 1,529,279 shares. CEO Duncan Penny sold 120,000 shares at a value of £2.9M which leaves him with 206,990 shares. President of global sales and marketing Michael Laver sold 71,994 shares at a value of £1.7M which leaves him with just 39,500 shares and VP of Asia Andy Sng Seng Kok sold 11,000 shares at a value of 264K which leaves him with 30,000 shares. This is a substantial sale and a shame to see but a lot of the directors still hold substantial shareholdings.
On the 8th October the group released a trading update covering Q3. The order intake for the nine months of the year was up from £137.5M to £153.3M and on a like for like basis it increased by 8%. Revenues on a like for like basis increased by 11%. Net debt increased from £46.5M to £49.3M over the quarter.
Overall order intake remains healthy but the rate of growth has moderated slightly during the period. Production volumes in China and Vietnam remain robust and the board are encouraged by their design win pipeline and overall momentum across the business. The board expects the group’s performance for the full year to be in line with current expectations.
I still believe this company is a sound one and a good investment but I have made a good profit here over the past year and now that growth is slowing I feel it might be time to take this off the table and await a better valuation.