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XP shrugs off inflation concerns

Margins tighten, yet profits and earnings surge ahead
July 30, 2018

Orders for XP Power’s (XPP) power converters flooded in faster than the group could ship them out in the first half of 2018, illustrated by a book-to-bill ratio of 1.09. Order intake grew by a tenth on a like-for-like, constant-currency basis as new design wins entered production and the engineer’s revitalised capital equipment customer base continued to ramp up spending.

IC TIP: Hold at 3,660p

Revenues increased by double-digits across all of the group’s end markets, led by the cyclical semiconductor industry. XP opted to disclose its semiconducting manufacturing turnover for the first time in this result statement and it made for pleasant reading. Sales from the sector, which has been spurred by demand for applications linked to the internet of things, surged 115 per cent, or 68 per cent when excluding the contributions made by recent acquisitions Comdel and Glassman.

Unfortunately, there was a caveat to operating in high growth markets. Industry-wide component shortages and subsequent price inflation led the group’s gross margins to tighten by 20 basis points to 46.7 per cent – an appreciating sterling and building of a “sufficient margin” of safety stock helped mitigate further losses. Management is making special efforts to manage its component inventory tightly and is confident there’s enough stock to deliver on its impressive £85.5m order book.

Investec forecasts adjusted pre-tax profits of £43.3m for the December year-end, giving EPS of 179.7p, against £36.1m and 147p in 2017.

XP POWER (XPP)   
ORD PRICE:3,660pMARKET VALUE:£687m
TOUCH:3,630-3,670p12-MONTH HIGH:3,750pLOW: 2,564p
DIVIDEND YIELD:2.2%PE RATIO:22
NET ASSET VALUE:647p*NET DEBT:37%
Half-year to 30 JuneTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201780.214.457.231.0
201893.218.576.433.0
% change+16+28+34+6
Ex-div:13 Sep   
Payment:11 Oct   
*Includes intangible assets of £92m, or 480p a share