Despite a tough trading environment in Q3, XP Power saw improving order flow and a book-to-bill ratio of 1.04x for the quarter and management anticipates meeting its FY19 expectations. Helped by currency, our FY19 revenue forecast appears conservative but in the face of volatile trading conditions, we maintain our estimates.
XP reported Q319 revenues of £53.8m, 2% higher y-o-y (-1% in constant currency) and 3% higher q-o-q. Order intake of £55.9m was 8% higher y-o-y (+4% in constant currency) and 22% higher q-o-q, resulting in a book-to-bill ratio of 1.04x for Q319. The company noted that order intake from healthcare, industrial and technology customers remained robust but orders from semiconductor equipment manufacturing customers (18% of H119 revenues) saw no notable recovery. XP announced a Q3 dividend of 20p (in line with our estimate), payable on 13 January 2020 to shareholders at 13 December 2019. Net cash (excluding lease liabilities) reduced slightly to £50.0m from £50.4m at the end of Q219. As the debt is US dollar denominated, this implies a larger reduction in the underlying debt.
Management anticipates group performance in line with its expectations as outlined at its interims in August (ie for H2 revenues to grow versus H1). To achieve our FY19 revenue forecast implies Q419 revenues of £47.1m (-4% y-o-y and -12% q-o-q), which, based on the order intake for Q3, look achievable. We make no changes to our forecasts, bearing in mind volatility around trade tariffs and sterling.
The stock is up 9% year to date and 15% since interims were announced in August. The stock has partially reduced the discount versus UK electronics and international power converter peers but continues to trade at a discount of c 30% and c 40% respectively on a current year P/E basis while offering a strong dividend yield. The company has taken steps to mitigate the impact of trade tariffs between China and the US as well as preparing for Brexit; evidence that margins are benefiting from this self-help should support upside to the stock. A return to order growth from the semiconductor equipment sector would be a further trigger for upside.