XP Power set to sparkle

XP, whose customers are typically blue-chip original equipment manufacturers in industrial, healthcare and technology markets, has been gobbling up market share thanks to a well-devised shift from distributing other people's products to manufacturing its own. Since it started making its own kit in 2006, the share of its revenues derived from products manufactured in-house has risen to two-thirds of the total. Relying less on third-parties and maintaining complete control over supply chains means the engineer makes bigger profits and is able to penetrate a more lucrative blue-chip customer base. The hands-on approach has also helped it drive gross margins up to 49.8 per cent and operating margins to 24.5 per cent.

Meanwhile, its customers like XP's direct selling tatics. Its attraction as a supplier has been enhanced by its ability to offer ongoing engineering support and its continued investment in new product lines in response to client needs. Indeed, with over 5,000 products at its disposal, the group offers a broader range of kit than its competitors.

Plenty of effort has gone in to developing new energy-efficient products that reduce power wastage, lower heat, consume fewer raw materials and incorporate low stand-by power operation. A green-friendly focus is proving to be a smart move, as environmental legislation in various countries means XP's customes are keen to reduce power wastage, improve recyclability and abolish the use of harmful chemicals.

A new factory in Vietnam has also been beneficial, and its production of magnetic components - crucial in power convertors - have been a hit with customers. This new plant, which went live in 2012, also mitigates reliance on XP's Chinese plant, where rising labour costs and the appreciation of the renminbi threatened to start weighing on profitability.

Solid cash generation meant the group moved to a net cash position at the end of 2014, with many believing it is only a matter of time before management starts delivering on its goal of acquiring new technology. Management also indicated in a January trading update that there will be a minimum total of 60p dividend per share for 2014, which at the current share price represents a yield of at least 4.2 per cent. By 2016 analysts at Investec expect a yield of 4.9 per cent, which is not bad on top of some pretty attractive earnings growth prospects. EPS is forecast to reach 113p in 2016 representing growth of 6 per cent a year between 2014 and then.