Xaar's (XAR) research and development (R&D) director Ramon Borrell has ploughed £200,000 into the specialist-printer maker's shares at 500p ahead of key product launches at the end of 2014 and early 2015 that could seriously alleviate the trading pressures that prompted last month's profit warning and share price collapse. What's more, the group's soon-to-depart chief executive and its finance director spent another £135,000 between them. We think investors should take note of management's confidence and follow suit, despite recent disappointments.
- Retention of market share
- New product stream
- Strong balance sheet
- Insider buying
- Softening demand
- Margin contraction
Before last month's warning, it's fair to say the market was over-optimistic about Xaar. It's not hard to understand why. The group achieved a compound annual sales growth rate of 29 per cent between 2008 and 2013 by winning share in fast-growing target markets. But such stellar performance, and the share rating that goes with it, is not easy to sustain, and when mid-way through last month Xaar warned that margins would slip, it shed a third of its stock-market value. That takes the share price fall from the December peak to 56 per cent.
The main issue is that, in response to increased competition, Xaar has reduced prices on its ceramics product range in order to protect its market share, while activity in some other markets - notably labelling - disappointed during the first half. Adjusted revenue for 2014 is now projected to be approximately £130m, which is a 3 per cent fall on last year. However, it has to be remembered that revenue growth for 2013 was exceptional at 55 per cent.
Xaar has benefited from a boom in printed ceramics in China. And while demand has eased, we feel it's significant that the group has chosen to hold on to market share. In fact Xaar could be about to strengthen its competitive advantage, helping boost growth and rebuilding margin, through the roll-out of innovative products. Last year, the group doubled its R&D spend to £16.4m. That will support new product launches for the ceramics market that will allow manufacturers to carry out every stage of the production process digitally. Initial revenues from these new ink-jet products - GS40 & Xaar 001 - will start to accrue during the fourth quarter. The group is also investing heavily in potentially revolutionary thin-film printing technology. In the context of this R&D-led push, we see Mr Borrell's recent large share purchase as a particularly interesting endorsement of both near- and long-term prospects.
| XAAR (XAR) | ||||
|---|---|---|---|---|
| ORD PRICE: | 526p | MARKET VALUE: | £402m | |
| TOUCH: | 524-526p | 12-MONTH HIGH: | 1,191p | LOW: 475p |
| DIVIDEND YIELD: | 1.9% | PE RATIO: | 13 | |
| NET ASSET VALUE: | 145p | NET CASH: | £53.5m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 69 | 10.7 | 11.3 | 3.0 |
| 2012 | 86 | 18.4 | 20.7 | 4.0 |
| 2013 | 137 | 41.1 | 43.2 | 8.0 |
| 2014* | 130 | 36.6 | 37.0 | 9.0 |
| 2015* | 136 | 38.9 | 39.2 | 10.0 |
| % change | +5 | +6 | +6 | +11 |
Normal market size: 500 Matched bargain trading Beta:0.50 *Edison forecasts, adjusted PTP and EPS numbers | ||||
We certainly don't want to play down the impact of increased competition, but it's hardly a novel situation for a printer manufacturer, and it's how that challenge is coped with that counts. Xaar's product innovation should help it differentiate its printers again and rebuild pricing. What's more, Xaar still boasts a strong balance sheet, with net cash equivalent to an eighth of its market capitalisation. And despite the squeeze on profits, this year's operating margin is still being pitched at 28 per cent - hardly a disaster.
