Berenberg slashes target price on XP Power

Berenberg, which reiterated its 'buy' rating on the stock, said XP Power delivered "a robust Q3 performance" following severe supply-chain challenges in the first half, with the group's order book continuing to provide "decent visibility".

Given the nature of XP's end markets, Berenberg stated that the prevailing view of many has been that a cyclical slowdown will affect orders in the coming months. However, Berenberg thinks that demand has remained "relatively robust".

"As supply-chain challenges ease and the group’s mitigating strategies come into action, we expect that XPP should deliver on its revised FY 2022 guidance," said the analysts.

With that said, the German bank also updated its forecasts to reflect the firm's latest guidance and include a one-off cost of £51.7m for the Comet Technologies judgment in 2022, culminating in a decrease of 13% to its 2022 full-year earnings estimates and bringing numbers closer to more recent consensus.

"After a tough 2022 and a review of the outlook, we think an interesting rebuild story is starting. Shares are down circa 70% year-to-date and at their lowest level since 2016 – trading on 7.3x full-year 2023 price-to-earnings ratio and with a 12.2% free cash flow yield, the lowest relative valuation in a decade – and our channel checks suggest the end-market position remains strong," said Berenberg.

"Net debt has increased further from H1 2022 to £118.0m. This reflects the adverse moments in FX – as XPP's USD-denominated debt translates to sterling – and the company's inventory build-up in recent weeks, with the group building a significant inventory buffer of circa £50.0m to mitigate the risk of component shortages. Management believes that as working capital unwinds and revenue performance is stronger into year-end, this should improve. On base case numbers, this results in FY 2022 net debt/EBITDA coming in at 2.0x, falling to 1.7x in FY 2023."

Reporting by Iain Gilbert at Sharecast.com