....for you today as we have had trading updates from XP Power (XPP) who provide the power and The Restaurant Group who can do a breakfast for you. So firing up the grill for RTN first we see:
Which is all very positive but the nasty surprise is when you get the bill as the shares are certainly not cheap. If we take current forecasts for next year of around 34 pence earnings and a 17 pence dividend which at this mornings price of around 680 pence leaves it on 20x with 2.5% yield. This is close to the rating it reached earlier last year when it went above 700 pence and hit my 2 & 20 sell trigger. Having suggested getting back into them in June 2014 at around 580 pence, they have served up a satisfying near 20% total return since then.
So on balance while I like the group and the quality of their operations I am starting to struggle again with the valuation. The previous high is close too (see chart below) which may either act as resistance or be bullish depending if they can get up to an through it. However, with the gap on the chart from the November update now having closed, the rich valuation and with the shares close to over bought and only offering an in line update today I think they may struggle from here. So I'm going to look to ask for the bill. Now for the switch to the power part of this note, see below the chart for comments on XP Power if that sparks any interest for you.
In case you are not familiar with this £275 million company here is how it describes itself:
XP designs and manufactures power controllers, the essential hardware component in every piece of electrical equipment that converts the power from the electricity grid into the right form for the equipment to function. XP typically designs in power control solutions into the end products of major blue chip OEMs, with a focus on the industrial (circa 45% of sales), healthcare (circa 30% sales) and technology (circa 25% of sales) sectors.
Once designed into a program, XP has a revenue annuity over the life cycle of the customer's product which is typically 5 to 7 years depending on the industry sector. XP has invested in research and development and its own manufacturing facility in China, to develop a range of tailored products based on its own intellectual property that provide its customers with significantly improved functionality and efficiency.
Headquartered in Singapore and listed on the Main Market of the London Stock Exchange since 2000, XP serves a global blue chip customer base from 29 locations in Europe, North America and Asia.
Their update today confirmed that revenues were up by 5% or flat after currency effects which is in line with forecasts, although these currency moves tend to boost their gross margins. They said that their North American business has shown strong momentum whereas trading conditions in Europe (unsurprisingly) remain subdued. Despite the mixed global economic conditions that prevailed in the year they achieved record order intake in 2014 and enter 2015 with a strong order backlog.
They also said that good factory loading at their Chinese facility should help to boost gross margins despite start up costs on their Vietnamese facility. This all helped them to generate cash and move into a small cash position from a small net debt position. On the back of this they confirmed that their 4th quarterly dividend would be not less than 21 pence to give 60 pence for the full year, up by just over 9% from 55 pence last year and this is also in line with forecasts.
Summary & Conclusion
Another steady if unexciting update from XP which at least suggests they will hit current forecasts of around 100 pence and 60 pence for earnings and dividends respectively. These are currently both forecast to grow by around 7% in the coming year which, with the shares at 1445 pence, would put them on a reasonable looking 13.5x with a 4.4% yield.
The quality seems good on this one (ROCE: 32.9% & 24.4% operating margin Source: Stockopedia) and they seem to deliver in a fairly steady fashion, although nothing is guaranteed. With the shares, in common with other smaller companies, having drifted back since the spring of last year when they got quite fully rated they have been languishing either side of 1400 pence for the last few months and the momentum is therefore not that great, if you look at that.
They are good quality and offer reasonable if not outstanding value down here so I'm happy to hold and wouldn't put you off buying if you are prepared to be patient as it seems to be a stock that moves in fits and starts sometime moving up dramatically and then drifting off as it has done more recently, maybe reflecting the limited volumes that get traded and small caps being in favour and then falling out of favour perhaps? (See chart). Still you pay your money and take your choice as I always say.
Finally Restaurant Group's American diners got me thinking...puts me in mind of an old comedy series from my youth - see the video and hear the tune at the end of this post as it's Friday already - Hey - Happy Days!