XP Power reported a strong performance in H1 considering the challenges presented by COVID-19 and a material uplift in orders provides a record backlog at the start of H2. With its diversified production capacity, a focus on higher complexity product targeted at growth markets and the ability to provide customer support globally, XP believes it will be in a stronger position post-COVID-19 than before. We have revised our forecasts to reflect the strong order intake, higher operating costs and higher share count.
With the bulk of its manufacturing in China and Vietnam, XP was early to see the negative effects of COVID-19. However, its Asian business has returned to normal operation remarkably quickly compared to the disruption still being felt by European and US economies. Demand from healthcare and semiconductor production equipment (SPE) manufacturers has helped the company to report H120 revenue growth of 6% y-o-y, bookings growth of 45% and normalised diluted EPS growth of 1% while reducing net debt by 17% from the end of FY19. With more visibility and confidence in the business, management has decided to reinstate the dividend, announcing an 18p per share dividend for Q220.
With a book-to-bill of 1.39x for H120 and an end-H1 backlog of £138.2m, the company has good visibility over production for H2. XP expects to continue to ship to SPE customers and the bulk of healthcare orders received in H1 will also be shipped in H2. We believe it would be difficult to ship the entire backlog in H2, providing further support to H121 revenues. Our forecasts assume that orders drop to more normal levels from Q320, and remain at this level for Q420 and FY21. We therefore expect growth to moderate in FY21. We have revised our forecasts to reflect stronger revenues, although higher levels of operating costs and the higher share count from a recent issue result in a decline in normalised diluted EPS of 2.2% in FY20 and 6.7% in FY21.
The share has gained 79% from its low in March and is now at a similar level to its pre-COVID-19 peak. On a P/E basis, it is trading in line with global power converter companies and UK electronics companies for FY20, and at a c 16% premium for FY21, while generating EBIT margins at the top end of both peer groups. While there remains uncertainty over demand during this period of disruption, we highlight XP’s strong backlog and balance sheet.