XP Power which is a leading international provider of essential power control solutions has reported interim results today. These seem fine although like many other Companies that report in Sterling the figures have been impacted by the strength of the Pound when converting their overseas turnover and profits. In this case it reduced an underlying 9% increase in revenues to just a 2% gain.
Conversely it did help to reduce their operating costs by £0.3 million which in addition to their own cost cutting efforts enabled them to improve gross margins from 48.6% to 49.8%. This fed through to an increased operating margin of 24.5% versus 21.6% last year although I note they did capitalize £1.2 million of product development expenses. Their own products do now however account for 66% of revenues with lots of new immature products developed over the last few years yet to have fully contributed to results.
This rise in turnover and margins together led to a 17.3% rise in Pre Tax Profits and a 20.8% increase in earnings and strong cash flow which reduced debt from £8.5 million to £1.5 million. On the back of this they increased the first half dividend by 9% which is now being paid quarterly and I note that they say this has compounded dividends at the rate of 15% over the last 10 years.
Summary and Conlusion
In summary a reasonable set of numbers despite headwinds from currency effects which also demonstrated their operational gearing and the benefits of their moving up the value chain with new products and support offerings. The group seems reasonably well placed to benefit from its historic investment in its own manufacturing facilities and new products that they have developed. In addition the business is reasonably diversified by end industry with in the first half healthcare representing 31% (2013: 30%), industrial 49% (2013: 48%) and technology 20% (2013: 22%). While the customer base continues to be highly diversified with the largest customer accounting for only 5% of revenue, spread over 100 different programs / part numbers. In terms of the outlook the Company sounded cautiously optimistic when they said:
"While global capital goods markets remain subdued overall, our order intake remains encouraging and we believe that we continue to take market share. We expect to grow revenues in 2014, although this underlying growth is expected to be impacted by the currency translation effects.... Predicting the likely performance of the US Dollar relative to Sterling in the coming period is difficult but the high proportion of our costs that are also Dollar-denominated will mitigate the impact on earnings.
A broad, up to date product portfolio and the development of an industry leading in-house manufacturing capability are at the core of our strategy and, when combined with excellent service and support, are leading to continued new program wins which should drive our future growth. This greater penetration of a Blue Chip customer base and significant design win success bode well for the future of XP."
in conclusion I like the steady delivery here and the moves they have made to increase the value added in their business plus the fact that it is reasonably well diversified by customer and industry. The shares in common with some other small and mid cap stocks have come back by around 20% from their peak earlier this year and seem to be finding some support between 1400 and 1500 pence on the chart. They have however lost some momentum as a result and currently trade below their 200 day moving average which may put some people off. I see Edison have left their earnings estimates unchanged and they are just below consensus of 101.6 pence so probably nothing to get too excited about in these numbers. However I think they look reasonable value on around 14x with a 4% yield backed up by strong cash flow and little or no debt so on that basis I'm happy to run with it.