With the acquisition of EMCO for £7.8m, XP is expanding its product range to encompass high-voltage products. EMCO brings new verticals and new customers to the group, and should benefit from access to XP’s sales channels. The company expects the deal to be earnings accretive in FY16 – we upgrade our FY15e EPS by 0.2% and FY16e EPS by 1.4%.
XP has acquired EMCO High Voltage Corporation (EMCO), a privately owned designer and manufacturer of high-voltage power modules, with a specialism in low-power designs. EMCO is based in California and has manufacturing operations in Nevada. With its focus on standard and modified standard products, EMCO’s business model is a good fit with XP. There is no overlap with XP’s product range, although the two companies do have some customers in common.
XP has paid $12m/£7.8m in cash, on a debt-free/cash-free basis, funded by a new $12m term loan. EMCO reported revenues of $7.9m/£5.1m in 2014. We have factored in conservative assumptions for EMCO, assuming revenues of $8m in FY16 at a 10% operating margin, making no assumptions at this point for revenue or cost synergies. We have upgraded our revenue forecasts by 0.4% in FY15 and 4.6% in FY16, and upgraded normalised EPS by 0.2% in FY15 and 1.4% in FY16. We forecast that XP will return to a net cash position by the end of FY16. We believe there is scope to leverage XP’s existing salesforce and customer base, which could accelerate volumes and enhance gross margins.
XP is trading on a P/E of 15.0x FY15e and 14.0x FY16e EPS, with a forecast dividend yield of more than 4% in FY15/16. While the company trades at a discount to peers (power converter companies trade at c 19x FY15e EPS on average EBITDA margins of 18%; UK distributors trade at c 14x FY15e EPS, on average 9% EBITDA margins), an improving order environment in the US will be key to upside in the short term. In the medium term, successful integration of and cross-selling arising from the two recent acquisitions could provide further upside to estimates. XP generates strong cash flows that should support further investment in growth, either through internal product development or bolt-on acquisitions.