XP Power Ltd: Estimates Revised Up
Edison | Oct 13, 2013 05:00AM ET
XP Power Ltd's, (XPP) Q3 trading update confirmed that business continues to improve, with Q3 order intake exceeding Q3 revenues. Revenues year to date were stronger than expected and we upgrade forecasts for FY13 and FY14 to reflect this, driving EPS upgrades of 4% for both years. In our view, the share price does not fully reflect XP’s profitability and cash generation.
Q3 revenue and bookings growth
XP has seen a more positive trading environment in Q313, with a book-to-bill above one. The increase in orders has been across all end markets and management believes it continues to gain market share. Q3 revenues grew 11% y-o-y (+10% in constant currency), with revenues for the nine months up 7% y-o-y (+6% constant currency). The company expects to report a sequential increase in revenues in H213, which compared to our forecast for a sequential decline of 1.1%. The company announced a Q3 dividend of 13p, in line with our forecast.
Estimates revised up
We have revised up our revenue forecasts for H213 and FY14 and have adjusted our exchange rate assumptions ($/£ from 1.54 to 1.56 in FY13 and from 1.54 to 1.59 for FY14). We increase FY13 revenues by 2.6% to £100m (+6.5% y-o-y; H2 revenues +4.0% h-o-h) and increase FY14 revenues by 1.6% to £105m (+5.0% y-o-y). This drives an increase in operating profit for both years, resulting in upgrades to normalised EPS of 4.2% in FY13 and 4.3% in FY14. We note that while changes to exchange rates affect headline revenue numbers, the impact at the net income level is much less significant due to the high level of dollar-linked costs.
Valuation: Undemanding with strong dividend yield
The stock trades on a P/E of 15.7x FY13e and 14.3x FY14e EPS, at a discount to competitor power converter companies (20x FY13e EPS on average EBITDA margins of 18.7%) and at a slight premium to the UK distributors (c 14.7x FY13e EPS, on a c 11.5% EBITDA margin). Based on XP’s superior margins, the company is undervalued versus its peers, and is further supported by its dividend yield (FY13e 3.8%; FY14e 3.9%). With encouraging signs that the global economy is in the early stages of a recovery, XP is starting to see a gradual improvement in the order environment, although it may still be too early to see a big upswing in bookings. However, even in the current environment, XP generates operating margins above 20% and sufficient cash to pay a dividend and pay down debt, and is therefore well positioned to benefit when orders do show a sustained recovery.
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