LON:XPP | XPP Power - I Sold Out Today

13th Oct '17 by Bonitabeach

7 comments 3602 reads

XPP Power has been on a rocket ride in 2017, the share price rising 90% since the start of the year. I bought in April 2012 - a modest investment I wish had been larger (don't we usually?). This wasn't always the case; the share price effectively drifted sideways three years for 2014 - 2016.

A 90% rise in 10 months - what has changed? The biggest influence would appear to be "market sentiment".

Not enough for me - a forward P/E of 22 is asking a great deal. It's a business and a management I admire but too rich for my more value orientated taste.

	TTM	2011	% Change
Sales	£149.7m	£103.6m	+ 46.1
Operating Margin	19.7%	24.4%	- 19.2
Net Profit	£22.4m	£20.3m	+ 10.3
ROCE	25.7%	35.4%	- 27.4
Dividend	73p	45p	+ 62.2
Dividend Cover	1.60	2.36	- 32%
EPS	116.5p	106.4p	+ 9.5%
Share Price	£33.20	£9.69	+ 242.6%

As always DYOR.

Bonitabeach

No position.

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Carey Blunt

13th Oct '17

I can see that you are saying that it’s not as good value as it once was, I would agree. However, it’s still a high quality business with a lot of momentum and with cash in the bank.
I still like it enough to hold, although I think it may well track back a bit towards its 50 day moving average and £32 at some point.

willhampson

I think its certainly due a slight pull-back in the next few days given the 25%+ surge this month; the chart certainly supports that. However, it's a quality business with good momentum. In the current market, I don't think the value is too bad at all.

jonno

Well done Bonita Beach

XPP may well go higher but I suspect that you have benefited from the most of the current upside. My timing was not quite as good. I bought on average at about £17.00 and having held for a few years and sold at £26.50 shortly after some serious share sales by directors but before the recent excellent trading announcement.

Still I made a reasonable return so it is churlish to complain.

abtan

I'm pretty new to the XP Power (LON:XPP) party, but must admit that I still find the shares reasonably valued. My rationale is as follows:

2016-17

Revenue has increased every quarter since Q1 2016 (I haven't looked at figures before then).
Revenue looks like it will come in around 30% higher for 2017 (£170m) vs 2016 (£130m).
For clarity I've estimated that 2017 Adj PBT will in around £39m.

2018

Conservatively speaking a 15% revenue increase next year gives 2018 Revenue = £196m.
Assuming GM@47% stays the same (but which should actually increase due to economies) and an increase in overheads of 15% + additional income from the recent acquisition gives me a 2018 Adj PBT of £c.47m.
IMHO that still doesn't look too toppy for a high quality company with a current EV of £630m and a well covered dividend.
The only negative I see is that cash flow only looks reasonable (but not spectacular).

I think the share has got a little more to go, so for the moment I'll continue to hold. If there's a pullback soon, hopefully it will only be a short term blip.

Hot Socks

14th Oct '17

XP has a long term ROCE of over 20%, rock solid balance sheet and excellent cashflows. It also has a history of successful execution for example of the new manufacturing facilities in Vietnam and the increased emphasis on own designed products over the past few years.

For me the essence of long term investing is buy a decent business and hold it until it stops being a decent business so having bought in July 2015 and seen a period where the holding showed a loss and a period of pretty static pricing as well as the recent surge I wouldn't sell now. Trying to buy at the bottom and sell at the top is trading which isn't my game - I know there are lots of clever people on this site who do just that and make a lot more money than me but I'm happy to leave you all to it and watch the dividends instead!!

I think at the current price I'd be cautious about buying though and ideally I'd reduce the weight of XP in my portfolio by buying elsewhere, difficult as it is to find reasonably priced shares to purchase at the moment. XP is benefitting from the exchange rates which flatter the results and the price bakes in good news which can't continue forever.

timarr

XPP's earnings have been flat for the last few years and it's the potential surge there which, presumably, has pushed up the share price. That's flattered a bit by exchange rates, but it appears that their long-term plan of developing their own components - up to over 70% now - is bearing fruit. Their devices are safety critical so once embedded are hard to shift until there are product renewals, and that's a relatively long lead time.

They used to just be a distributor and they still have access to that network, so that gives them an added edge. But the great thing about them is their superb cashflow, which has been consistently good over the years, even with the investments in new manufacturing in Vietnam. They're now deploying cash into acquisitions - that always carries some risk, but to my amateur eye they appear to be buying things that are relevant to the existing business and bolt-ons, which de-risks things somewhat.

Buying at this elevated price is a gamble on them continuing to drive earnings at the current accelerated level. Given that their target eps increase per year is 10% I think that's unlikely, but it's a quality outfit with very good track record and what looks like a building moat. With tech companies that's always vulnerable if the management take their eye off the ball, but that hasn't happened so far.

I've held for a number of years and don't intend selling, but I could easily see the price slipping back here. At the very least I'd expect peak drift for a couple of years. But, hey, I'm in no hurry ...

timarr

paperking

16th Oct '17

Given the changes in business direction into designing and manufacturing their own products including repositioning factories its not surprising that the shares went sideways even doen for an extended period but having bought in at that time I now see the benefits of managements clear thinking and execution of plans. The fact that further factory space is needed further emphasise the success. I am bullish on the future but have a maximum holding of 3.5% which is below what I would normally hold on a balanced rated share and is historic. I have a continuing argument with myself on being over cautious on this share but because of this have regularly been taking profits with the result profits removed equal the cost of my current investment so I'm in for nothing if you like and it pays income.

XPP Power - I Sold Out Today

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Bonitabeach

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