XP Power’s Q3 trading update confirms strong revenue growth, despite currency headwinds, and good progress in design wins across all end markets. Q3 bookings growth has moderated slightly, partially reflecting uncertainty in the semiconductor sector over capex plans, but management is confident of achieving expectations set at its recent interim results; we leave our forecasts unchanged.
XP received orders worth £153.3m in the nine months to 30 September 2018 (9M18), +11% y-o-y, +18% in constant currency and +8% on a like-for-like basis (excluding currency and acquisitions). In 9M18, the company reported revenues of £146.1m, +18% y-o-y, +24% in constant currency and 11% on a like-for-like basis; this equates to a book-to-bill of 1.05x for the period. As noted in July, the company has seen a shortage of components such as capacitors and has built its safety inventory to cope with extended lead times – this is factored into our gross margin assumptions for H218 and resulted in a small increase in net debt to £49.3m from £46.5m at the end of H118. The Q3 dividend of 19p is in line with our forecast.
The 9M18 results imply Q3 order growth of 18% y-o-y/3% q-o-q and Q3 revenue growth of 21% y-o-y/14% q-o-q, with a book-to-bill of 0.98x. Considering that Q3 includes a full three months for the Glassman acquisition versus one month in Q2, this highlights a slight slowing in order growth which we assume relates to semiconductor production equipment (SPE) customers. Despite this, the company continues to see market share gains and good design win momentum across all end markets and anticipates that it will meet expectations as outlined at the end of July. We leave our estimates unchanged.
In the last three months, the stock has pulled back 16%, we believe in part due to concerns over weakening demand from SPE customers. We estimate that XP currently generates c 25% of revenues from the SPE sector so is not immune to weakening sector demand, but market share gains as well as robust demand in its other end markets should reduce the potential exposure. On a P/E basis, XP is trading at a premium to global power converter companies and at a small discount to UK electronics companies, with a dividend yield at the top end of the range. XP generates EBITDA and EBIT margins at the top end of its peer group.