Investors in XP Power (XPP), which manufactures and supplies critical power control components to the electronics industry, received an unwelcome wake-up call at the start of the quarter after the firm lowered its full-year outlook on weak demand in China.

The shares, which were trading close to a six-month high at £23.60, crashed 45% to £12.98 in response on heavy volume.

WHAT DID THE COMPANY SAY?

At the start of August, the company posted first-half results showing a 30% increase in revenue with an improvement in gross margins and described trading over the previous four quarters as ‘better reflecting the group’s capability’.

At the same time, it flagged a 40% drop in new orders which it put down to customers moderating orders from the ‘unprecedented levels seen in 2021 and the first half of 2022, reflecting an easing of supply chain constraints and a softening of end market demand’, but said its order book was worth around £250 million ‘which remains well above historic levels and provides good full year visibility’.

Just two months later, it has revealed third-quarter trading was below expectations due to weaker end-market demand and some customers deferring orders into next year.

‘The economic uncertainty in China has also led to a reduction in demand in that market. These conditions are likely to continue for the remainder of the year, leaving the outlook below our prior expectation, with operating profit for the year ended 31 December 2023 now expected to be broadly similar to last year’, the firm explained.

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 2024 and 2025.

CLOSE TO COVENANT LIMITS

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’, words which no shareholder wants to hear.

As a result, the firm is ‘initiating dialogue with its lenders to seek covenant and liquidity flexibility through the year-end and into 2024’.

Meanwhile, to conserve cash, the firm has temporarily suspended work on its new Malaysian plant, and while the second-quarter dividend will be paid on 12 October no further dividends will be paid for the 2023 financial year.

‘We are disappointed by the change in current trading conditions and 2023 outlook, which is largely being driven by weaker market demand leading to customer shipment deferrals. This will impact the current full year outlook and we are taking appropriate mitigating actions to reduce costs and conserve cash’, the firm added.

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