XP Power Limited (XPP) — Investment Research Note

Executive summary

XP Power designs and manufactures critical power control solutions (power converters, high-voltage/high-power products, RF power) for three end markets: Semiconductor Manufacturing Equipment (~40% H1 26 revenue), Industrial Technology (~41%), and Healthcare (~19%), with a designed-in annuity model generating 5-7 year revenue tails per program. The trajectory across the filings is a classic peak-trough-recovery: revenue peaked in 2022 (£290m), collapsed through a market-wide destocking cycle in 2023-2025 (£230m in 2025), forcing a £40m emergency equity placing in March 2025 and a suspended dividend. As of H1 2026, order intake is up 55% cc, book-to-bill 1.53x, and management is guiding to a sharp H2 acceleration driven by the AI-led wafer fab equipment upcycle — the single most important valuation question is whether the market has already fully priced this recovery (shares have doubled YTD).

Fair value estimate

Fair value range: 1,650p – 2,150p per share (implied market cap £460m – £600m)
Methodology: Blend of forward P/E on 2027-2028 normalised earnings and EV/EBITDA on through-cycle recovery. Key assumptions:
- 2027 revenue £275-295m (H1 26 run-rate + H2 26 acceleration to £135m firm orders + continued growth)
- Adj operating margin recovering to 13-16% (vs 7.9% H1 26, financial framework target 20%, 2022 actual 14.8%)
- Implies £36-47m adj OP, ~£25-33m net income at 25% tax, ~90-118p EPS
- Applied 17-19x forward P/E for a designed-in specialist industrial with structural AI exposure
Current market cap: £494.5m at 1,807p
Upside/downside: mid-case fair value ~1,900p implies ~5% upside to current

The stock has already re-rated aggressively — from 900p at start of 2026 to 1,812p at 30 June — largely capturing the semi-recovery narrative. The financial framework 20% margin target would justify materially higher prices (~2,500p+), but this has not been achieved since 2019 and requires flawless execution.

Sector context

ICB classification confirmed: Industrial Goods and Services / Industrial Technology component supplier.
Quality profile: Above-average operational discipline (return to 45.9% gross margin, £8.6m op profit on flat revenue), but below-average balance sheet resilience (had to raise emergency equity in 2025). Growth profile mixed — cyclical exposure means growth is trough-recovery rather than compounding.
Listed peers: Advanced Energy Industries (AEIS-US, closest RF/power peer to Semi Cap), TT Electronics (TTG.L), discoverIE Group (DSCV.L). XP is smaller and more concentrated in Semi Cap than most.

Investment thesis

Direct AI-receiver via wafer fabrication equipment upcycle: Semi Cap orders +116% cc in H1 2026, book-to-bill 1.81x, with explicit customer commentary that demand is "driven by the demands of AI for leading edge logic and High Bandwidth Memory" and "some indications of earlier ordering by customers... to better position themselves to service increased demand" 2026-08 interim results. XP supplies etching, deposition, ion implantation and inspection tools.
Operating leverage now visible but not yet realised: H1 26 gross margin 45.9% (up 450bps YoY, exceeding "mid-40s target"), overheads flat at £41.5m, yet operating margin only 7.9% — the gap to the 20% financial framework target is essentially pure operating leverage as revenue scales through fixed overheads and factory utilisation improves 2026-08 interim results. Malaysia factory nearing Q4 2026 production start-up.
Structural improvements from 2025 crisis are permanent: China factory closed, RF division wound down, Vietnam expansion complete, net debt down from £93.5m to £47.7m, leverage 1.3x with covenant limit of 3.0x. The balance sheet is now materially more resilient than at any point in the last 3 years 2026-08 interim results, 2026-03 FY25 results.

Key risks

Semi cycle inflection is a two-way risk: The current upcycle is being partly front-loaded by customer inventory hedging (management explicitly noted "some of the orders received will be delivered in future periods"). A cyclical peak within 12-18 months could see the book-to-bill collapse 2026-08 interim results.
Valuation now assumes recovery execution: Stock has doubled since Aug 2025 (892p → 1,812p) and trades near a 52-week high. Any H2 2026 or 2027 execution slip on the promised acceleration would compress the multiple sharply. First-half operating profit already at slight risk from "input cost inflation as the electronics supply chain tightens" 2026-08 interim results.
Comet legal case not fully resolved: The 9th Circuit reversed the $40m damages judgment and remanded for retrial in July 2026, but the £50m provision remains on the balance sheet pending "clearer next steps." The bond receivable of £50.4m is held outside the group. A retrial adverse to XP could re-establish liability 2026-08 interim results, post-balance sheet events.

Operating leverage

This is the most compelling structural feature of the business. In H1 2026, XP delivered £8.6m adjusted operating profit on £109.1m revenue (7.9% margin) — essentially flat revenue vs H1 2025 (£110.9m) generated a 79% increase in operating profit, purely from margin expansion. The financial framework targets 20% operating margin and >45% gross margin at scale. The fixed cost base is substantial: R&D £10.4m/half, corporate costs £9.8m/half, manufacturing overhead £5.7m/half — roughly £52m of essentially fixed costs per half 2026-08 segment reconciliation. On the £135m of firm H2 2026 orders alone, run-rate revenue is ~£270-290m annualised; at recovering utilisation and 45-46% gross margins, incremental contribution should drop through at ~35-40%. A 10-20% revenue beat above management's implied ~£250m 2026 could plausibly double H2 operating profit vs H1. The 2022 comparator shows 14.8% margin at £290m revenue — the framework 20% remains unproven in practice, which is why we do not fully credit it in the base case.

Value-trap signals

Dividend suspended since late 2023 with no interim declared in 2026 (only expected to resume when leverage returns to 0-1x range).
Emergency March 2025 placing at 975p (18% dilution) at what turned out to be near-trough valuation — highlights limited balance sheet buffer for cyclical downturns.
Multiple 2023-2024 downgrades and profit warnings before stabilising in 2025.
Comet litigation contingent liability of £50m still on balance sheet pending retrial.
Cyclical business with genuine downside — 2023 revenue fell 22% year-on-year.

Earnings vs. expectations

Since 2025, results have been consistently "in line" with the reset expectations: FY 2025 delivered adj OP of £17.3m vs consensus £17.3m (range £16.3-18.2m); H1 2025, Q3 2025, FY 2025, Q1 2026, and H1 2026 trading updates all explicitly stated "in line" multiple trading updates. However, the 2023-2024 period showed a pattern of successive downgrades and a February 2024 profit warning triggering the equity raise. The pattern is: repeated misses through the cyclical downturn (2023-2024), then consistent in-line delivery since guidance was rebased in early 2025. Insufficient evidence of consistent beats to justify a beat-trend score.

Conviction

Conviction: 3 (moderate). Anchors: (1) auditor-reviewed financials with clean IFRS presentation and detailed segment/adjusted reconciliation; (2) order book with £135m firm H2 orders gives high visibility to near-term revenue; (3) balance sheet risk materially reduced post-placing. Limiters: (1) the fair-value call is very sensitive to the assumed 2027-2028 margin recovery path (13% vs 16% vs 20% would swing fair value from ~1,500p to ~2,500p); (2) cyclicality means terminal margins are inherently uncertain and could roll over.

Driver scoring

ai_beneficiary (80): Direct semi cap equipment supplier with explicit management commentary tying the Q2 2026 order surge to "the demands of AI for leading edge logic and High Bandwidth Memory". Not merely mentions but visible in the order book.
operating_leverage (70): Clear fixed cost structure (~£52m/half of essentially fixed costs), management targeting 20% op margin vs current 7.9%, gross margin already recovering to 45.9%. Not pure software but genuine industrial operating leverage.
earnings_surprise_trend (50): Consistent in-line delivery since 2025 rebase, but 2023-2024 showed multiple misses. Not enough clean beat evidence.
cyclicality (75): Semi cap equipment is genuinely cyclical (peak-to-trough revenue swings of 20%+ in the recent past). Diversification into Industrial Tech and Healthcare provides only partial dampening.
moat (55): Designed-in status provides 5-7 year annuity revenue, expertise in HVHP/RF specialty products creates some switching costs, but XP has ~1-2% share of a fragmented ~$6bn market. Not a dominant franchise.
leverage (40): Net debt 1.3x LTM adj EBITDA, covenant limit 3.0x, target 0-1x. Materially better than 2023-2024 but still meaningful — cyclical business with balance sheet requiring active management.
earnings_quality (55): Multiple adjusting items ongoing (Comet legal, RF exit, China closure, Malaysia commissioning), significant FX translation noise, but statutory results reconcile cleanly to adjusted, cash flow tracks.
management_quality (60): Successfully navigated the 2023-2024 crisis, executed on cost actions, delivered the RF exit and China closure to plan, delivered guidance since rebasing. Dividend suspension was appropriate. Not exceptional but competent.
growth_momentum (68): Order intake +55% cc H1 26, book-to-bill 1.53x, but revenue growth only 2% cc H1 26. Momentum is inflecting, not yet flowing through.

Overall score: 590

Fits three of the four pillars: strong AI exposure (35% weight ✓), strong operating leverage (25% weight ✓), acceptable downside protection (15% weight ✓). Fails valuation discipline (25% weight): stock has doubled YTD, trades near 52-week high, and the base-case fair value offers only ~5% upside — the AI recovery narrative is largely priced in. A better entry point would have been available six months ago; at 1,800p investors are paying for delivery rather than getting the option for free.