Functional review of two Industrial stocks: XP Power Ltd and Dialight Plc

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Functional review of two Industrial stocks: XP Power Ltd and Dialight Plc

 Functional review of two Industrial stocks: XP Power Ltd and Dialight Plc

The FTSE-100 index opened in the green despite the fear of the second wave of COVID-19 as China reports new cases. The index increased by 121.85 points or 2.01 per cent and it was trading at 6,186.55 (before the market closed, GMT 3:00 PM). The STOXX Europe 600 index traded at 364.84 up by 3.33 per cent from the previous close (before the market closed at 3:00 PM GMT).

  • The trade surplus of Eurozone plunged in April 2020. Exports and imports of 19 countries in the Eurozone dipped by 29.3 per cent and 24.8 per cent, respectively.
  • The fears over rising cases of coronavirus have dragged down the oil price. The Brent crude futures augmented by 2.09 per cent and was trading at USD 40.55 a barrel (at 3:00 PM GMT).
  • In the UK, the non-essential stores have re-opened after being closed in March. The non-essential stores include books, toys, furniture, shoes etc.

Given the above development in the market, we will discuss two industrial stocks XP Power Ltd (LON: XPP) and Dialight Plc (LON: DIA). XP Power Ltd and Dialight Plc shares were trading at GBX 3,600.00 and GBX 328.00, respectively (before the market closed at 1:52 PM GMT+1). Let’s understand their operational and financial position.

XP Power Ltd (LON: XPP) – Remains Prudent Over Cash Flows as the Company withdraws the final dividend

XP Power Ltd is headquartered in Singapore and listed on the London Stock exchange. It is included in the FTSE-250 index. The Company designs and manufactures power controllers and electronic equipment that converts power from the electricity grid into the right form for the equipment to function. XP Power operates in the technology, industrial electronics, healthcare and the semiconductor equipment manufacturing segment. The Company has a manufacturing plant in China and Vietnam.

Event update - as stated on 3rd April 2020

  • XP Power withdrew its proposal of the final dividend of 36 pence per share for FY19 because of market uncertainty (due to the pandemic). The total cash outflow for FY19 final dividend was close to GBP 6.9 million.

Business Update (from January 2020 to May 2020) as stated on 4th June 2020

  • All manufacturing and logistics facilities of the Company remain operational.
  • The Company experienced challenges in the supply chain during initial lock-down in China; however, right now, it is working at the pre-COVID-19 level.
  • It had a steady order intake in April and June and witnessed a robust demand in the Healthcare business.
  • The products that drove the Healthcare demand were ventilators, continuous positive airway pressure, drug delivery devices, specialist lung ultrasound, X-Ray machines, etc.
  • In April and May, the demand from the semiconductor equipment manufacturing sector recovered from the lows seen in 2019.
  • Due to the pandemic, resilient order intake has seen in the technology and industrial electronics sector in the recent past. The customers have postponed orders due to low activity in the end market.

(Source: Trading Update, Company website)

Balance sheet Strength

  • As on 31st May 2020, XP Power had a net debt of GBP 38 million much lower than GBP 45.3 million at the end of March 2020. The Company had an undrawn capital facility and cash of approximately GBP 58 million.
  • In November 2019, the Company renewed its facility from USD 105 million to USD 120 million with a further extension option of USD 60 million for four years till 2023. The utilized facility has a rate of LIBOR plus a margin of 1.20 per cent for the utilized facility and a margin of 0.40 – 0.50 per cent for the unutilized facility.

The shift in the manufacturing facility

  • The Company changed the manufacturing of its low power/high voltage DC modules from Nevada in the US to Vietnam. The Vietnam plant has approval for production of over 2000 products.
  • Annualized cost saving of approximately GBP 4 million is expected to be generated by shifting manufacturing. The Nevada plant was scheduled to be closed by June 2020 as stated in the Company’s annual report.

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters) -1-Year Chart as of June 16th, 2020, before the market close

The shares of XP Power (LON: XPP) was hovering at GBX 3,600 per share (before the market close at 1:02 PM GMT+1) and remained the same from its previous closing price of GBX 3,600.00 per share. The Company had its 52 weeks High and Low of GBX 3,880.00 and GBX 1,855.00, respectively. The Company had a market capitalization of GBP 696.21 million.

Business Outlook

The management believes the increased demand in the Healthcare segment seen in the first five months of 2020 to normalize in H2 2020. The current reduction in the air freight capacity is a challenge for the Company, which is implying cost pressures and is likely to remain until the freight capacity resumes to normal levels. The strong order-book gives near term visibility.

Dialight PLC (LON: DIA)

Dialight PLC provides sustainable, and energy-efficient LED lighting. It offers LED lighting mainly for industrial application, for industries such as heavy industry, oil and gas, mining, chemical, pharmaceutical.

Trading Update as reported on 16th June 2020

  • The Group has experienced generally improving in the recent weeks, but volatile, order intake in the US.
  • In the recent trading update, the order book is higher than the expectations, due to the temporary closure of the facilities in April 2020. Whilst the Company has reduced the overdue backlog and is increasing deliveries to customers week-on-week.
  • As on 31st May 2020, the net debt stood at GBP 17.3 million (31 December 2019: GBP 16.5 million).
  • Dialight has successfully augmented its committed facilities from GBP 25.0 million to GBP 35.0 million.

Operational and Financial updates for FY19 as reported on 2nd April 2020

  • In FY19, Dialight generated revenue of GBP 151.0 million. The lighting segment represented 74 per cent of the Company’s revenue at GBP 111.5 million. It was lower by 13 per cent on constant currency whereas signals & components added GBP 39.5 million and was down by 15 per cent on constant currency.
  • The Group terminated its outsourced manufacturing contract in Q4 FY19. It incurred a cost of GBP 10.2 million from exiting agreement with its existing manufacturers. It brought the final assembly of all its LED lighting manufacturing in-house and invested in two manufacturing facilities in Tijuana (Mexico) and Penang (Malaysia).
  • No dividend was paid for FY18 and FY19.

Financial Performance – FY19

(Source: Company website)

Geographic Performance by segment -FY19

(Source: Company website)

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters) -1-Year Chart as of June 16th, 2020, before the market close

The shares of Dialight (LON: DIA) was hovering at GBX 319.55 per share (before the market close at 1:32 PM GMT+1) and an increase of 4.43% from its previous closing price of GBX 306.00 per share. The Company had its 52 weeks High and Low of GBX 571.6 and GBX 157.50, respectively. The Company had a market capitalization of GBP 100.28 million.

Business Outlook

Dialight PLC refrained from giving any guidance for FY20; however, it has stated that it expects its business performance to be below than what was expected at the time of releasing FY19 annual result. The Company as paused all its capital expenditure on new products which was stated to be in the range of GBP 2 million and GBP 5 million of capitalized development cost. However, the Group's long-term prospects stay decent due to the ongoing conversion to industrial LED lighting. The Company also seems to be well-positioned to grow profitability.

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