XP Power Ltd (XPP)

 

XP Power: Transformed

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XP Power’s results confirm the businesses’ decade long transformation. On 15 times adjusted profit it may be good value.

In the year to December 2015, XP Power earned 9% more revenue and 4% more profit than it did in 2014, although much of the improvement was due to currency fluctuations. Weak growth in its biggest market the US, was compensated by strong growth in Asia and Europe. It anticipates revenue growth in 2016.

The company increased its modest borrowings modestly to make two acquisitions.

Modesty is a good characteristic, when it comes to buying businesses. It stops finances being stretched, and smaller companies can be easier to assimilate and operate more efficiently.

XP, which has an enterprise value of over £300m, acquired EMCO, for £7m. The company says the opportunity to sell EMCO’s products through its, presumably, much larger sales operation makes it a significant growth opportunity.

US-based EMCO manufactures high voltage DC (Direct Current) power supplies used in industrial and healthcare equipment and scientific instruments. It’s a new niche for XP which specialises in power adaptors that convert mains AC (Alternating Current) to DC, in the same markets.

The second acquisition was a 51% stake in a South Korean distributor, which customises power supplies including XP’s for equipment manufacturers.

A share price of £15.58 values the enterprise at £311m, about 15 times adjusted profit. The earnings yield is 7%.

The shares could be good value. XP has done a lot right since it decided early in the last decade to design and manufacture power supplies. Previously it was a distributor earning lower returns, but since 2010 the company’s results have been characterised by high and stable levels of profitability (return on capital fluctuates modestly around 30%) as it has lifted the proportion of revenues from XP products to 68%. It says the transition is complete, although its stated ambition is to increase home-grown sales to 75%.

XP’s emphasis is on efficiency and close customer relationships. Revenues from “Green” power products that use less energy and materials, and do not contain substances harmful to the environment, grew 27% in 2015 to 22 % of total revenue. Although it can take a year or two for an XP Power supply to be designed into equipment, requiring some collaboration with manufacturers, once it is part of the product XP can expect revenues for many years.

Transformation of XP’s results suggests research and development may have delivered superior products, which XP’s vertically integrated business can earn more profit from. The company’s production facilities in China and now Vietnam may give it a cost advantage over many competitors.

Although it manufactures in Nevada, in other respects EMCO could be a mini-XP. It designs its own product families and customises them for similar blue-chip customers, some already using XP AC to DC convertors to provide lower voltage DC to EMCO high voltage DC power supplies.

XP has significant competitors though, and we have yet to see what happens to the new business model in a serious economic slump. XP’s power supplies are components in capital equipment, typically machines used in factories and hospitals and investment ebbs and flows with economic activity. Though it supplies a variety of industries, profitability is likely to fluctuate.

Given strong finances and very experienced management, it also seems likely XP will endure and prosper.

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