XP Power (XPP) £11.20

Loss to date: 52.6%

We flagged power switching and electronic controls specialist XP Power (XPP) at the start of the year, believing a 2022 sell-off had created a good entry opportunity into a high-quality business which had been too harshly punished for a stretched balance sheet and weakness in some of its end markets.

WHAT HAS HAPPENED SINCE WE SAID TO BUY?

The shares made decent initial progress and, with some volatility along the way, were trading roughly in line with our entry point until recently.

In April we reacted positively to news of a solid start to the year for the company and, while first-half results were mixed with a drop in new orders, the market did not seem too alarmed with the order book still standing at a healthy £250 million.

However, that all changed with an ugly profit warning on 2 October thanks to weak demand from China, where the recovery story has stalled despite the lifting of zero-Covid restrictions.

The current order book has shrunk to around £225 million, with no recovery yet in the semiconductor manufacturing sector, although customers are said to be positive on the outlook for 2024 and 2025.

With revenue and profits seen below expectations, and a knock-on effect on working capital, net debt – which currently stands at £163 million – is seen rising further meaning gearing will be ‘close to or above current covenant limits in the near term’.

XP is scrambling to get covenant and liquidity flexibility from its lenders for the remainder of 2023 and into 2024. The plan to suspend dividends and investment in a new Malaysian plant speak to the financial pressure the business is under.

WHAT SHOULD INVESTORS DO NOW?

XP is a decent business but arguably overextended itself in making acquisitions and this left it vulnerable to any downturn in trading. Painful as it is, the suspension of the dividend is sending us a message we cannot ignore and at this point investors should cut their losses.

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