Get ready for inkjet print head designer Xaar (XAR) to deliver a sharp recovery in earnings.

The appointment of a new management team with deep industry experience is successfully reinvigorating the group’s business model.

The group is benefiting from a strong product pipeline, coupled with a plethora of new innovative offerings that have been well received by customers.

Management has facilitated this by moving the significant historic investment in intellectual property from the development stage to commercialisation.

And there is scope for Xaar to reach breakeven on an EBITDA (earnings before interest, tax, depreciation and amortisation) basis earlier than the anticipated breakthrough in 2022 following the recent acquisition of FFEI, a leading integrator and manufacturer of industrial inkjet systems.

As the last independent provider of print heads in the market Xaar is a potential bid target, another reason to be constructive on the outlook for the share price. Large integrated systems manufacturers have acquired all of the other providers and the company looks relatively inexpensive on an 2024 price to earnings ratio of 12.9 times, based on Investec forecasts.

A CHEQUERED PAST

Anyone who has previously invested in digital inkjet printing technology company Xaar is likely to have a distinct aversion to revisiting the company as an investment opportunity. The group suffered due to over investment in research and development and production capacity. In mid-2018 management announced that sales in their key ceramic tiles printing market were declining more sharply than anticipated.

Shortly afterwards the dividend was suspended and management revealed that the group had effectively run out of cash to finance the development of their ‘Thin Film’ technology. This was a major disappointment as the group’s 2020 revenue target of £220 million was predicated on sales deriving from the application of this proprietary technology.

The group’s share price fell from 489p in in October 2017 to 20p in early March 2020, a decline of 95%. However the future outlook for Xaar is much more promising.

ORIGIN STORY

Xaar was originally formed as a spin out from Cambridge University, and is a leading designer and producer of inkjet print heads. Inkjet is displacing traditional pad and screen-printing in a disparate range of industrial end markets.

This has created a significant opportunity for the group to increase sales and recent research by Investec analysts’ Thomas Rands and Ben Bourne has highlighted the key features that differentiate Xaar’s print technology from its peer group.

The group’s unique print-head architecture enables jetting of ultra high viscosity fluids in multiple positions including curved surfaces. A practical example of this technology is the personalisation of golf balls. Xaar’s technology is also able to create a drop which is more than five times the size of a native drop, without any reduction in the number of drops produced per second.

Ink recirculation enhances print reliability, machine uptime, as well as reducing ink waste. The last point is significant because Xaar’s print technology also offers an environmental benefit as it allows customers to directly jet print more precisely on their products thereby using less ink, solvents and energy.

Investec comments: ‘We see exciting new potential applications for Xaar printheads in spray painting robots and enhanced building materials. We look forward to hearing further details, potentially later in 2021.’

IMPORTANT ACQUISITION

In July 2021 Xaar acquired FFEI limited, a leading integrator and manufacturer of industrial digital inkjet systems and digital life science technology, in a deal worth up to £9 million.

Commenting on the acquisition Xaar’s CEO John Mills said: ‘Having restructured and stabilised our core print-head business, the acquisition of FFEI will accelerate our strategy and expand our customer offering in a range of markets. As well as providing a number of ready-made solutions, the acquisition will further enhance Xaar’s world class expertise.’

According to house broker Investec the increased electrics and software capacity will enable Xaar to undertake a larger number of customer projects.

And FFEI’s product expertise in print bar manufacturing will fill a void in Xaar’s product portfolio, saving time and money. From a strategic perspective the acquisition offers Xaar’s clients a more complete solution and will improve both their development timescales and their time to market. From an earnings perspective Investec believe that the acquisition has increased the likelihood that EBITDA breakeven will ‘occur sooner than forecast’.

Recent trading has been solid, with an in-line update for the six months ended 30 June 2021 (22 Jul).

Revenue for the period is expected to be approximately £26 million, an increase of 11% and 8% relative to H1 and H2 2020 respectively. The company added that the ‘short-term outlook remains positive with a healthy order book across the business’.

The prospects for Xaar’s key core end markets – Ceramics and Glass and Coding and Marking and Direct to Shape, which together account for approximately 70% of group revenue, are improving.

In Ceramics, with Chinese business a key driver for the group historically, Xaar has succeeded in winning back previous customers, and in Glass it has developed a robust market position across a diverse array of applications.

New marketing initiatives have contributed to the strong performance within the group’s Direct to Shape division, and the Coding and Market Division has reaped the benefits from sustaining its strong market position.

Given the marked increase in demand, there may be concerns regarding the group’s ability to increase capacity. However Ed Wielechowski, fund manager at Odyssean (OIT), a major shareholder in Xaar, has highlighted that the group has a large well invested manufacturing capacity, ‘management has said that they can probably double revenues from current levels of approximately £50 million to £100 million with as little as £2 million in additional capex (capital expenditure) ,’ he says.

Another recent announcement outlining a partnership with the Beijing National Innovation Institute of Lightweight is an encouraging move that highlights the opportunity for new applications in digital inkjet. These include printing glass, electronics, 3D and automotive spray painting.

A FRESH START

Xaar’s new management team are overcoming the group’s troubled past. Over recent years Xaar has invested more than £70 million in its Thin Film development programme.

Critically this historic intellectual property is now being moved from the development to commercialisation stage, suggesting this spending is finally coming to fruition after the earlier frustrations.

In an era characterised by overseas private equity firms increasingly scouring the UK equity market for takeover targets, it is worth remembering that Xaar is the only independent inkjet technology company with more than 30 years of experience. The group’s key institutional shareholders include Schroders, Invesco and Fidelity.

By Mark Gardner

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