XP Power’s orders surge on semiconductor demand

Power converter specialist XP Power (XPP) saw its adjusted operating profit jump by almost a third in 2020, to £46m, coming in ahead of analysts’ expectations. This reflects sales to semiconductor equipment makers surging by almost 90 per cent year-on-year as the chipmaking industry moved to an upcycle and the group increased its market share.

XP Power’s order intake rose by a fifth to £258m, which includes £15m-20m of orders from healthcare customers making critical care devices to treat Covid-19. Together with momentum from semiconductor fabricators, this more than offset weakness from the industrials sector, giving the group a book-to-bill ratio of 1.11.  A ratio above 1.0 implies more orders were received than filled, indicating strong demand.

Having expanded its manufacturing facility in Vietnam in 2019, this has helped mitigate the impact of US tariffs on goods imported from China and also limited Covid disruption to production. Thanks to manufacturing efficiencies from higher production volumes, as well as lower travel costs, the adjusted operating profit margin improved by over two percentage points to 19.7 per cent.

On the back of strong free cash flow generation, net debt (excluding lease liabilities) has come down by almost 60 per cent to £18m, equivalent to just 0.3 times cash profits (Ebitda). With £91m of liquidity, the group has plenty of firepower to deploy on acquisitions to boost its growth.

Having reinstated its quarterly dividend in August, the group has now declared a fourth quarter payout of 36p per share.

Chairman James Peters says that “trading conditions in the early months of 2021 give ground for continued optimism.” XP Power expects further underlying revenue growth this year and it should benefit from the global shortage of semiconductors. Longer-term, there are still multiple structural growth drivers, including the proliferation of technology – which should fuel demand for more chips – and rising safety regulation. With that in mind, a forward price-to-earnings ratio of 27 times doesn’t seem overly demanding. Buy.

Last IC View: Buy, 4,320p, 17 Dec 2020