XP Power: Dividend Forecast Upgraded

XP Power (XPP) reports that H113 trading was in line with management expectations, with revenues growing 5% year-on-year, although order intake was flat over the same period. We maintain our revenue and earnings forecasts and increase our dividend forecasts by 6% in FY13 and 2% in FY14 to reflect higher than expected Q1 and Q2 dividends. In our view, the share price still does not fully reflect the company’s profitability and cash generation, and a dividend yield of more than 4% provides further support.

H113 trading encouraging
The company reported that H113 revenues grew 5% y-o-y or 4% in constant currency. The company continues to see a subdued order environment – order intake for H1 was flat y-o-y but up 7% h-o-h. The Vietnam facility is now operating at break even, so is no longer acting as a drag on gross margins, which should be higher than the 46.9% reported in H112. Based on our full-year forecast for 3.9% revenue growth, we leave our revenue and earnings forecasts unchanged. Net debt was reduced from £10.6m at the end of FY12 to £8.5m at the end of H113 and was down 43% y-o-y.

Dividend forecast upgraded
The company announced a Q2 dividend of 12p vs our 11p forecast. As the Q1 dividend of 11p was also higher than our forecast, we have raised the full-year forecast from 51p to 54p. For FY14, we increase our forecast from 54p to 55p. This increases our FY13 net debt forecast by £0.4m and reduces our FY14 net cash forecast by £1.0m.

Valuation: Undemanding with strong dividend yield
The stock trades on a P/E of 14.2x FY13e and 13.0x FY14e adjusted EPS, at a discount to competitor power converter companies (18-32x FY13e EPS on EBITDA margins of 8-19%) and in line with the UK distributors (c 14x FY13e EPS, on a c 11.5% EBITDA margin). Based on XP’s superior margins, the company is undervalued vs its peers, and is further supported by its dividend yield (FY13e 4.4%, FY14e 4.5%). Even using the bottom end of the power converter companies range, XP would trade at 1,555p. Until the global economy shows sustained signs of recovery, XP is unlikely to see a big upswing in bookings. However, even in the current weak environment, XP still generates margins above 20% and sufficient cash to pay a dividend and pay down debt, and is therefore well positioned to benefit when orders do recover.

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