7:59 cut – XPP (and VLX)

XP Power (XPP) – H1 Results

XPP make specialist power supplies (or “power solutions” as they call them).

As well as prompt H1 and FY results, XPP also provide detailed quarterly trading updates. They have a 31st December year end. In their Q1 report they expected full-year revenue to be above last year, but that there would be some second-half weighting. Today they report a “tougher” Q2 and revenue behind at the half-way point, but re-iterate expectations of full-year growth.

Their revenue guidance seems to derive as much from expectations of ongoing sterling weakness as the performance of their business since it is clear that in dollar terms revenue will be significantly behind last year. Forecasts for profitability have already fallen significantly but still appear (on the face of it) optimistic.

It is interesting to see that they are moving production from China to Vietnam to avoid Trump’s import tariffs. Volex (VLX) are also undergoing the same exercise (Volex also mention Indonesia). In both cases these moves are incurring costs – for Volex these are being put through as exceptional closure costs. The hope must be that the intention of these trade tariffs is and will remain to force China to open its markets rather than to force production to the USA. If the latter then moving to Vietnam will only give temporary respite.

I also note that the markets that XPP report as strong (e.g. Healthcare) is where Volex focus on, and that Volex are absent in semi-conductor manufacturing equipment which XPP report as weak.

XPP are a good company producing specialised products and earning 20% margins. In many ways they are a target for Volex to aim for in an industry that is largely commoditised and low margin. But they are not immune from adverse changes in their markets or terms of trade. It is evident that I suspended too much disbelief when initially paying 18x forward earnings for a company in this sector. Today’s forward PE of 11.5x looks much more realistic, but further cuts in forecasts look likely. I will be looking at reducing (at a loss) this morning.

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