XP Power cancels dividend due to semiconductor woes

XP Power (XPP) had already warned the market of the difficulty it has faced in the past year, and it has been forced to get rid of its final dividend.

The company manufactures power controllers that transfer electricity from the grid and protect electrical equipment in the event of a power surge. Industrial technology makes up 43 per cent of sales, followed by semiconductor manufacturing equipment with 32 per cent of revenue and healthcare with 25 per cent.

The problem in the past year was the slowdown in the semiconductor market, following the pandemic lockdown boom. In the second half of the year, semiconductor revenue fell 22 per cent year on year, leaving it down 9.7 per cent for the full year. Industrial and healthcare performed a lot better, with revenue up 26 per cent and 37 per cent, respectively.

However, this revenue growth did come at the expense of the order book, which is being worked through. Management says easing supply chains mean customers aren’t ordering as far in advance. Correspondingly, the order book fell 38 per cent to £192mn. To offset this drop in demand, XP Power is going through a cost reduction programme.

After the trading update, broker Numis dropped its 2024 operating profit forecast from £45mn to £30mn. It now has XP Power trading on a forward price/earnings ratio of 17, which looks expensive for a company that is struggling.

The semiconductor industry is notoriously cyclical, so demand should pick up again, but this must be well known within the company. The fact the company is going through a cost-cutting programme is concerning as it means it must be forecasting a prolonged period of lower demand. Stick to hold.

Last IC View: Hold, 2,220p, 28 Feb 2023