When a share price has doubled in 18-months investors might think that they have missed the boat.

This is not the case, in our opinion, with XP Power (XPP), which we continue to view as a genuine growth stock.

Capable of outperforming current single-digit pre-tax profit growth expectations.

For those unfamiliar with the investment story, XP Power is a science-based engineer of complex power equipment solutions.

Many power systems require custom output voltage combinations, unique control or status signals and specific mechanical packaging for optimal performance and integration. This is kit designed for when off-the-shelf solutions simply won’t do, which is encouragingly frequent.

This is where XP’s engineering stands out. The company has a stated aim to have the most comprehensive and up-to-date product range in its target markets, particularly in defence/aerospace, healthcare, rail and a few other custom power niches.

Combined XP estimates a £1.5bn target market with projects typically several years in the making and often developed hand-in-hand with the end customer.

Outstanding track record

XP’s operating track record is outstanding. Order intake typically runs ahead of revenues, which tells investors that future demand is growing faster than work currently on its plate.

This increased about 10% in the first half to 30 June once currency fluctuations are stripped out, important to get a true picture because it sells most of its kit overseas.

In terms of profit, operating margins, which take into account staff and factory costs, nudged up, from 21.7% to 22.2%. That shows it is getting the benefit of new facilities in low-cost Asia.

XP also makes select acquisitions, always with an eye to bolster the customer or product expertise base. May’s £31.8m purchase of Glassman High Voltage, expanding the product range into specialised high voltage and high powered products, is a good example.

XP pays regular and growing dividends, up 6.5% in the half to 33p, paid out on a quarterly basis (16p Q1, 17p Q2). It’s able to do so because cash generation is always solid. The modest dip to £15.8m in the first half from operations is impressive given that the company was building inventory to meet pre-existing demand.

Some components shortages have been in evidence this year and there’s been a bit of price inflation added to costs but management seem to have managed the supply chain well to cap the impact.

The other concern would be from a major cyclical downturn in demand, although management have seen little evidence of that happening in the foreseeable future, while previously won design wins and strong orders offset that threat. (SF)

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