In FY18 XP reported strong organic growth and operating margins, generating EPS growth of 18%. After a series of acquisitions, it has a full portfolio of power solutions to meet all voltage and power requirements, and management is now focused on increasing its market share at key accounts. In our view, the stock is trading at close to trough multiples with a dividend yield above 4%.
XP reported the third record year of revenues and EPS. Double-digit organic growth was augmented by acquisitions that have broadened the product portfolio. The company is now positioned as one of a few providers of the complete range of power solutions across all voltage and power ranges. Even after adding headcount to support sales and engineering, XP expanded normalised operating margins by 36bp to 22.0% and reported normalised EPS growth of 17.6% y-o-y. As well as integrating acquisitions, the company is focused on expanding its Asian manufacturing capacity and putting in place a single ERP system to manage the business more efficiently.
As previously flagged, the semiconductor sector is seeing weaker demand. During this period, the company remains focused on product development and is working closely with customers on future designs to ensure it is well positioned for volume recovery. With its now expanded product range, XP is in a good position to grow its penetration of key accounts. We had already factored in weaker demand from the semis sector; minimal estimate changes reflect FY18 results and higher capex.
XP is trading at a material discount to peers on all metrics. In our view, concerns over the weakness of the semiconductor sector are weighing heavily on the share price, even though this makes up only a quarter of XP’s revenues. With a broad product portfolio focused on structural growth markets, local customer support, control over the manufacturing process and strong cash generation, we view the company as well positioned to grow market share while maintaining high operating margins. Evidence of order growth in the semiconductor equipment sector is likely to be the key trigger for share price upside from this point.