XP Power’s Q1 trading update confirmed that revenues increased 4% y o y/q o q and the Chinese facility has returned to normal staffing levels. Strong demand, mainly from healthcare customers, saw a 25% q o q increase in orders and a Q1 book-to-bill of 1.49x. Despite strong Q1 demand, the level of uncertainty surrounding both supply and demand for the rest of the year has caused XP to cancel its previously proposed Q419 dividend in order to preserve cash. We maintain our revenue forecasts, but factor in higher costs in FY20 and remove our Q419 and Q120 dividend estimates.
XP received orders worth £73.1m in Q120, up 34% y-o-y (up 33% constant currency) and up 25% q-o-q. The healthcare sector was particularly strong (XP is designed into c 60 different ventilators) but other sectors were also robust. Q1 revenues of £49.1m were up 4% y-o-y/q-o-q despite the supply chain challenges in China. The Chinese facility is now back up to full strength and Vietnam is also fully operational. End Q120 net debt stood at £45.3m; the company has committed liquidity of £50m through bank loans and cash facilities. XP has decided to withdraw the resolution for the previously announced final 36p dividend, which will preserve £6.9m in cash, and will look to resume paying quarterly dividends as soon as possible.
Q1 order intake was higher than we had expected, but it is unclear how much of it is incremental new business and how much is demand being pulled in from H220. In addition, weaker sterling versus the dollar could provide upside to our revenue forecasts. We make no change to our revenue forecasts, as although the Q1 order intake would indicate a revenue upgrade, there is too much uncertainty over demand for the rest of FY20 as well as the potential for COVID-19 restrictions to hamper XP’s ability to deliver product. We factor in higher costs in FY20 to deal with disruptions in the supply chain and cut Q419 and Q120 dividends to zero.
Since XP reported FY19 results on 3 March, the stock has declined 23% on fears of further COVID-19 disruption. On a P/E basis, XP continues to trade at a material discount to global power converter companies and a smaller discount to UK electronics companies, despite generating EBIT margins at the top end of the peer group. Until there is more clarity on the longer-term global economic implications of COVID-19, we would expect the shares to tread water. However, we highlight XP’s strong backlog and access to funding, which should support it during this period.