Bolstering the US opportunity
XP Power Ltd (LONDON:XPP) reported FY14 results substantially in line with expectations. Strong order intake positions the company well for 2015 and increased investment in the US should support further growth from the blue chip client base. Manufacturing at the Vietnamese facility is ramping-up to plan, supporting further growth in profitability and increasing the company’s self-sufficiency. We forecast steady growth in revenues and earnings and continued strong cash generation, providing support for the dividend policy and the funds to invest in further product development and M&A.
FY14 results: Underlying growth
XP reported FY14 revenues in line with the recent trading update – revenues were flat y-o-y, although in constant currency grew 5%. Gross margin increased 50bp to 49.6% and operating margin by 120bp to 24.2%. A lower than expected tax rate resulted in diluted EPS of 101.1p versus our 99.8p forecast. The final Q4 dividend of 22p takes the full year dividend to 61p, versus our 59p. The company finished the year with a net cash position of £1.3m.
FY15 outlook positive; investing further in the US
Record order intake of £105m in FY14 provides the company with a strong backlog going into 2015. With stronger levels of demand in North America compared to Europe, the company has decided to increase investment in the US with extra sales and engineering resource. Management expects to see revenue growth in 2015, although this is helped by the weakening of sterling against the dollar.
Changes to forecasts and valuation
We have revised our estimates to take account of the stronger dollar versus sterling and the increased investment in the US. Our FY15 revenue forecast increases by 4% (y-o-y growth 10.6%) and we introduce an FY16 forecast for 4.2% growth. While we slightly increase our operating profit forecast for FY15, an increase in the tax rate results in a 2% reduction in our diluted EPS forecast. We forecast earnings growth of 5% in FY15 and FY16. XP is trading on a P/E of 14.6x FY15e and 13.9x FY16e normalised EPS, with a forecast dividend yield above 4% in FY15 and FY16. Based on XP’s superior margins, we believe it is undervalued versus peers; competitor power converter companies trade at c 19x FY15e EPS on EBITDA margins of 17-21% versus XP’s 27.7% forecast EBITDA margin, and the UK distributors trade at c 13.5x FY15e EPS, on a c 10% EBITDA margin. The company generates strong cash flows that should support further investment in growth, either through internal product development or through bolt-on acquisitions.
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