XP Power driving market share and efficiencies

Bosses at XP Power (XPP) remain circumspect even though that full-year trading is now expected to be “modestly' ahead of analysts” consensus expectations. It may be a case of under-promising and over-delivering given that the power converting specialist also beat the consensus through 2020. The company is still feeling the benefit of surging demand from semiconductor equipment makers, an industry which has generated no end of analyst comment over the past six-months or so.

It hasn’t been all plain sailing. The company has not been immune to issues over price and availability within the component supply chain, but it has still been able to drive operational efficiencies through the half. Freight costs may have been weighing on profitability, but XP Power increased the gross margin by 170-basis points to 46.6 per cent, as the transfer of manufacturing to Asia following the closure of its Nevada site resulted in cost savings.

Evidence of further efficiencies is provided by the 3 per cent increase in adjusted operating cashflow, achieved despite working capital being diverted to “support customer demand and to secure supply of crucial components”. A cash conversion rate of over 100 per cent also demonstrates that in-house improvements have been to the fore.

Analysts at Peel Hunt predict free cashflow yield of 3 per cent this year and next, while adjusted EPS is expected to increase from 188.5p in 2021 to 196.7p in the following year.

The group has increased its market share among the chipmakers, while overall order intake increased by 8 per cent to £158m. Peel Hunt upgraded its numbers on the back of the interim figures, raising its target price from 5,850p to 6,000p. A forward rating of 28 times forecast earnings is not unreasonable given growth prospects. Buy.

Last IC view: Buy, 5,400p, 02 Mar 2021