XP Power Limited (XPP) — Investment Research Note

Executive summary

XP Power designs and manufactures critical power control solutions ("power supplies") for Semiconductor Manufacturing Equipment (SME, ~40% of H1 2026 revenue), Industrial Technology (~41%) and Healthcare (~19%), with a Vietnam-anchored Asian supply chain and Germany/US complementary sites. After two years of savage downcycle (revenue fell from £316m in 2023 to £230m in 2025, adj EPS collapsed from 82p to 22.5p, dividend suspended, £40m equity placing in March 2025), momentum has decisively turned — H1 2026 order intake was +55% cc with a 1.53x book-to-bill and semi orders +116% cc. The valuation question today is whether the market has already priced the recovery (stock +115% in 12 months to 2,033p) or whether operating leverage from the semi/AI upcycle still has room to run.

Fair value estimate

• Fair value range: 1,750p – 2,350p per share (~£490m – £658m market cap)
• Methodology: forward P/E on mid-cycle earnings, sanity-checked against EV/adj-EBITDA
• Key assumptions:
  • Mid-cycle revenue: £310–340m (financial framework targets ~10% organic growth from £230m 2025 base; H2 2026 already has £135m firm orders vs H1 £109m actual — implies FY26 ~£245–260m, then further growth in FY27 as semi upcycle plays through)
  • Mid-cycle adjusted operating margin: 14–17% (vs ~7.9% in H1 2026, historical 18–20%; management framework target 20%)
  • Mid-cycle adjusted EPS: ~110–150p on ~28m shares
  • Fair P/E: 14–16x for a cyclical industrial with genuine AI-receiver exposure
  • Central mcap ~£574m, mid share price ~2,050p
• Current market cap: £549.4m at 2,033p — essentially at the midpoint of our fair-value range
• Absolute upside/downside: roughly flat (-14% to +16%) — the market has already reflated the shares to reasonable value given the improving picture

Sector context

• ICB classification confirmed: Industrial Goods and Services (Industrials).
• Quality/growth/leverage vs peers: growth profile is now above typical industrial peers (order momentum), quality is average (recent operational misses, legal overhang, dividend still suspended), leverage is in line (1.3x). XP has a stronger AI/semi-capex tailwind than most UK-listed industrials.
• Listed peers: Advanced Energy Industries (NASDAQ: AEIS, closest direct competitor in RF/HV for semi), MKS Instruments (NASDAQ: MKSI), and to a lesser extent discoverIE (LSE: DSCV) and TT Electronics (LSE: TTG).

Investment thesis (3 bullets)

• Genuine AI/semi picks-and-shovels exposure with visible order-book conversion. H1 2026 semi order intake was +116% cc with a 1.81x book-to-bill, driven explicitly by "the demands of AI for leading edge logic and High Bandwidth Memory" and customers pulling forward orders on AI-infrastructure supply chain tightness 2026-08 interim. £135m of firm H2 orders sits against H1 revenue of £109m.
• Operating leverage inflecting hard. Adjusted gross margin recovered 450bps to 45.9% in H1 2026 on nearly flat revenue, and adjusted operating profit rose 79% (23% cc) on a 2% cc revenue increase. Management explicitly notes "the benefit of operating leverage largely still to come" as revenue expands into the fixed cost base of Vietnam/Malaysia manufacturing 2026-08 interim.
• Downside protection has meaningfully improved. Net debt/EBITDA at 1.3x (from 2.3x at end-2024), no dividend cash-out until leverage <1x, RCF headroom to 2028/2030, and the Comet appeals court reversed the $40m damages judgment in July 2026 — a $50m bond currently sits outside the group and could be released 2026-08 interim.

Key risks (3 bullets)

• Semi cyclicality and pull-forward risk. H1 2026 CEO commentary flags "some customers placing orders earlier to better position themselves… earlier ordering means some orders received will be delivered in future periods" 2026-08 interim. If AI infrastructure enthusiasm cools before Vietnam/Malaysia capacity is fully absorbed, revenue could disappoint.
• Comet legal case not yet fully resolved. The Court of Appeals reversal is favourable but the case has been remanded for retrial; the Group has "prudently retained the provision previously established" of ~£50m 2026-08 post balance sheet events. A worse-than-expected retrial outcome would consume balance-sheet firepower.
• Manufacturing ramp execution. Vietnam capacity expansion and Malaysia commissioning (Q4 2026 full production) coincide with a rapid demand ramp. Management flags "potential for temporarily reduced efficiency as line capacity is rapidly expanded" and "input cost inflation as the global electronics supply chain tightens" 2026-08 interim.

Operating leverage

XP's cost base is meaningfully fixed relative to revenue: R&D (£20–21m annually), central corporate costs (~£16m), and factory overheads absorb across a variable production base. The H1 2026 print gives a clean read on leverage: revenue essentially flat (+2% cc) but adjusted gross margin +450bps (45.9%) and adjusted operating profit +79% (£8.6m vs £4.8m). Management's financial framework targets 20% adjusted operating margin at through-cycle revenue — versus 7.9% in H1 2026 and 7.5% for FY 2025. On roughly £70–80m of adjusted fixed overhead plus factory overheads, incremental revenue on established product lines should carry ~40–50% contribution margin. A 10-15% revenue beat versus the current £245–260m FY26 run-rate — plausible given £135m of firm H2 orders and Q2 2026 semi book-to-bill of 1.81x — could plausibly deliver 60–100% growth in operating profit into FY27. However, this is second-half-2026 loaded, not permanently structural: XP is a scaled industrial, not a software platform, so we place it in the upper end of the "significant operating leverage" band rather than the "pure operating leverage" band. 2026-08 interim, 2026-03 FY 2025 results

Value-trap signals

• Dividend suspended since late 2023 and not reinstated even in H1 2026 (leverage needs to reach 0-1x first).
• Repeated guidance misses and downgrades through 2023-2024, including the emergency £40m placing at 975p in March 2025 2025-03 placing announcement.
• Comet legal case has been an overhang for three years and is still not fully resolved.
• Two years of GAAP losses (2023, 2024, 2025 all reported statutory losses) — mitigating factor: driven by legal provision, restructuring, China exit and RF exit — largely non-recurring by 2026.

Earnings vs expectations

Looking across the filings: 2023 full-year (Feb 2024) — company warned in Feb 2024 that 2024 outlook would be "significantly below market expectations", triggering the placing; a clear guidance miss. H1 2024 (Aug 2024) — management noted full-year expectations "unchanged" but at the low end. 2024 full-year (Mar 2025) — delivered as re-guided but launched the £40m emergency placing; another disappointment vs prior expectations. H1 2025 (Aug 2025) — met the reset expectations. 2025 full-year (Mar 2026) — met analyst consensus (£17.3m adjusted operating profit, exactly at the £17.3m midpoint). Q1 2026 and H1 2026 — trading update and interim both "in line" with unchanged full-year guidance. Pattern: three consecutive years of downgrades from 2022 to early 2025, then meeting reset expectations from mid-2025 onwards. The recent track record of hitting reset numbers is encouraging but doesn't yet compare to a consistent-beat cadence.

Conviction

Conviction: 3 (moderate).

Supporting factors: (1) the H1 2026 order book gives strong visibility into H2 and early 2027 revenue; (2) the semi cycle and AI capex environment is a well-corroborated tailwind that independent industry data (WFE spend) supports; (3) the financial framework provides a clear medium-term margin target anchored in historical achievement.

Limiting factors: (1) operating margin recovery from 8% to management's 20% target requires both revenue expansion AND execution across three site transitions (China exit, Vietnam ramp, Malaysia commissioning) — significant scope for slippage; (2) the Comet legal case retrial adds a wide error bar around any per-share fair value, since a full $50m release vs a fresh adverse award represents a ~£40-50m swing (~150-180p per share).

Driver commentary summary

XP is a legitimate direct beneficiary of AI infrastructure spend via its semi-cap-equipment customer base — this is not marketing language, it shows up in +116% cc semi order intake and management's explicit callouts of "leading edge logic and HBM" driving customer capex. Operating leverage has already begun to inflect (450bps gross margin expansion in H1 2026 on flat revenue). Valuation is fair rather than cheap after the stock's 12-month rally, so this scores as a solid partial fit for the investor profile rather than a high-conviction top-band buy.