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The Electrical and Electronic company, XP Power Ltd and the Financial Services company, CMC Markets Plc have released their trading update on 3^rd April 2020. Let’s walk through the business model & performance, strategies & outlook and recent developments of both the companies.

XP Power Ltd (LON:XPP)

(Source: Company Presentation)

XP Power Limited (LON:XPP) is a manufacturer and developer of critical power control mechanisms for the electronics sector. The Group offers power solutions, including DC-DC converters and alternating current (AC)-direct current (DC) power supplies.

The Business model that yields sustainable long-term growth

The company’s business model focuses on the link between XP Power sales engineer and customer design engineer. Its products include a drug delivery device to a high-end communications device operating in a harsh environment. Its customers would approach the company, and the Group will assist them in designing a power converter into their end system to allow it to function.

(Source: Company Website)

Strategies To make progress

• To develop a market-leading range of competitive products, organically and through selective acquisitions.
• Target accounts where it can add value.
• Increase the vertical penetration of target accounts.
• Build a global end to end Supply Chain that balances high efficiency with market-leading customer responsiveness.
• Lead the industry on environmental matters.

Recent Developments Impacting the Trading Environment & Business

• 3^rd April 2020: The Group has published its trading update for Q1 FY2020, and the key highlights were:
  • Order intake continues to be strong with all sectors seeing order intake growth. In Q1 FY2020, the orders intake grew by 34 per cent to GBP 73.1 million as compared to GBP 54.6 million in the same period last year.
  • Revenue had increased by 5 per cent to GBP 49.1 million as compared to GBP 46.9 million in Q1 FY2019 despite the extended shutdown of the manufacturing facility in China.
  • The book to bill ratio, which tracks the relationship between orders received and completed sales increased by 0.33 to 1.49 in Q1 FY2020 as compared to 1.16 in the Q1 FY2019.

(Source: Trading Update, Company Website)

• 3^rd March 2020: The company announced its annual results for the fiscal year 2019.

• 4^th December 2019: XP Power announced that Pauline Lafferty joined the Board as a non-executive director with effect from 3 December 2019.

How do they create the value?

• The company has an exposure to a broad cross-section of end markets but with no direct exposure to consumer electronics.
• It has a customer base of over 4,500 active customers, with no major concentration of revenues from any one client.
• The Group has enhanced customer relationship management tools which enable the development of required products and help in innovating new products.
• The company operates with attractive margins and lower capital investment requirements.

Key Financial Highlights for FY2019 to Ponder on

• For the financial year 2019, the order intake stood at £214.9 million, an increase of 8% from the previous year (2018: £198.4 million).
• The full-year revenue for the financial year 2019 surged by 2% (4% decline on a like-for-like and 2% decline in constant currency basis) to £199.9 million (2018: £195.1 million), reflecting the short-term delay to shipments during the ERP (Enterprise Resource Planning) implementation in the fourth quarter and the cyclical weakness in the Semiconductor Equipment Manufacturing sector.
• The gross margin decreased to 45.1% in FY19 (2018: 47.3%). The adjusted operating profit decreased by 16% to £35.9 million in FY19 against £42.9 million in FY18, while reported operating profit decreased by 32% to £26.7 million in 2019.
• The adjusted earnings per share (EPS) reduced by 16% to 145.5 pence in 2019 (2018: 172.8 pence), while the reported diluted EPS tumbled by 32% to 105 pence in FY19.
• The free cash flow for the financial year 2019 was £26.2 million. On 31st December 2019, the net debt stood at £41.3 million (2018: £52.0 million), with the decline due to foreign exchange movements and improved cash flow generation.
• The Group has recommended a final dividend per share of 36 pence, reflecting the total dividend per share for 2019 was 91 pence, an increase of 7% from 2018.

Share Price Performance over the last one year

Daily Chart as of April 3^rd, 2020, before the market close (Source: Thomson Reuters)

XP Power Ltd shares were trading at GBX 2,700 at the time of writing before the market close (at 11.27 AM GMT) on 3^rd April 2020, up by 7.57% versus the previous day closing price. Stock's 52 weeks High is GBX 3,880.00 and Low is GBX 1,855.

Business Outlook – Reflecting Strong Demand

The Group had witnessed a strong order intake in Q4 2019 across the Group. The company is monitoring the supply chain closely due to uncertainty created by COVID-19 virus. Its Vietnam division is performing well while capacity recovering has seen in China. Nevada closure and product transfer to Vietnam on track. The Group expected strong cash flow generation and Multi-year design win momentum would provide a platform for long term growth. The company’s expectations remained unchanged subject to the uncertain future impact of COVID-19.

CMC Markets Plc (LON:CMCX)

CMC Markets PLC (LON:CMCX) is a London-United Kingdom-based leading international retail financial services company, which provides an online and mobile trading servicing for both the retail and institutional clients. The company has offices across several of world’s leading financial centres, comprising Sydney, Toronto, Frankfurt, and Singapore. It was established in 1989. For the trading platform and client service, the company has won multiple industry awards.

Highlights of Business Model

• CMC Markets give importance on client service and focuses on the quality of services provided, which enhances its image, product innovation and internal culture.
• The Group continuously monitors industry trends and client’s requirements through numerous feedback mechanisms.
• The company enables its clients to take ownership of their personal financial investments. It has an excellent platform which provides complete control and flexibility.

Strategy for continuous growth and development

(Source: Company Website)

The Company focuses on three objectives which comprise of its strategy. Established markets, Institutional and Client journey optimization.

Recent Developments Underpin Sustainable Profitable Growth

• 3^rd April 2020: The Group has released the Trading and Covid-19 Update with the following highlights.
  • The CFD business has generated gross client income (client transaction fees) of c.£241 million (FY 2019: £216.0 million) due to the strong underlying performance in the business throughout the year.
  • Client income retained has been considerably stronger than the 75-80% range that was guided at the half-year results (H1 2020: 82%).
  • The Group expected CFD net trading revenue to be approximately £214 million (FY 2019: £110.2 million).
  • The stockbroking business also had a strong year, and net revenue is expected to increase to c.£32 million (FY 2019: £15.5 million).
  • Operating costs, including depreciation and amortisation and excluding variable remuneration, are expected to be in the region of £136 million (FY 2019: £120.4 million).

• 20^th March 2020: The Group has announced a trading update for the first 13 trading days of March from 1 March 2020 to 19 March 2020 (the "Period") and the COVID-19 updates.

Key financial highlights ruling the trading environment – H1 FY2020

• Strong performance with net operating income increased by £31.7 million or 45% to £102.3 million as compared with the corresponding period of the last year (H1 2019: £70.6 million) driven by an increase in CFD revenue per active client and growth in stockbroking net revenue.
• Through its three strategic initiatives, the Group has generated high value via institutional relationships and continues to invest in its proprietary technology platforms to diversify its offering. This shows the success of the ANZ Bank white label partnership, which has generated net revenue of £10.0 million in H1 2020.
• Operating expenses for H1 FY20 increased by 13% to £71.2 million (H1 2019: £62.7 million), driven by a higher variable remuneration (up £4.5 million) and an investment in the stockbroking business (up £4.3 million).
• Excluding variable remuneration, the profit before tax was up by 318% to £30.1 million (H1 2019: £7.2 million).
• Decline in active clients, down 7% from H1 2019, which included 4 months of pre-ESMA (European Securities and Markets Authority) regulations, however up 3% against the second half of 2019.
• Regulatory total capital ratio was stated at 18.0%, and own funds stood at £182.8 million.
• Interim dividend per share was 2.85 pence (H1 2019: 1.35 pence), representing a total dividend per share for the year expected to be in line with policy at 50 per cent of profit after tax.

Share Price Performance over the last one year

Daily Chart as of April 3^rd, 2020, before the market close (Source: Thomson Reuters)

CMC Markets Plc shares were trading at GBX 204.10 at the time of writing before the market close (at 10.05 AM GMT) on 3^rd April 2020, up by 5.42% versus the previous day closing price. Stock's 52 weeks High is GBX 212.59 and Low is GBX 74.30.

Business Outlook Scenario

Following strong CFD net revenue performance at the start of H2 2020, the Group expected that net operating income would be in excess of £180 million. The company expected to increase in revenues due to Revised risk management strategy, which has improved the retention of client income, Institutional growth through a larger, more profitable B2B client base and annualised impact of enlarged Stockbroking business. The Group expected its operating costs (before variable remuneration) to broadly be the same as in H1 2020 and effective tax rate expected to rise for the full year.

Comparative Stock Performance of XP Power Ltd & CMC Markets Plc with FTSE-All Share Index

In the last one-year, XP Power Ltd and CMC Markets Plc share price has increased 6.72 per cent and 146.07 per cent, respectively as compared to the FTSE All Share index performance.

(Source: Thomson Reuters)