Bargain shares: Exploiting repeat buying opportunities

Furthermore, even when share prices run up to my target prices and beyond on positive newsflow, profit-taking will always ensue at some point as is the nature of stock markets. However, this presents further investment opportunities to take advantage of. Invariably the share price pullback in a bull trend will try to retest a previous resistance level/share price high, the reaction to which can be informative. That’s because profit-takers will also be monitoring the pullback with a view to buying back into the stock. This explains why share prices can rally hard after bottoming out.

A good example is technology group Xaar which has pulled back from the June high (230p) to test the December 2020 high (183p). It looks primed to resume the uptrend, as does Mpac, a niche packaging engineering group.

On the technology beat

• Earnings-accretive acquisition
• Analysts maintain forecasts but see scope for inflexion into profit to occur sooner than forecast

Cambridge-based Xaar (XAR:185p), a leader in the development of inkjet technology and maker of piezoelectric drop-on-demand industrial inkjet printheads, has acquired Hemel Hempstead-based FFEI, a leading integrator and manufacturer of industrial digital inkjet systems and digital life science technology.

FFEI’s core specialisms are in print systems and printbar manufacturing, which have enabled the company to establish several joint development projects with leading organisations in both digital inkjet and life sciences. It’s highly profitable, too, reporting revenue of £9.9m with an operating margin of 9 per cent in the 2020-21 financial year. Xaar paid an initial cash consideration of £3.7m on completion and there is an additional £5.4m deferred consideration payable over the next three years.

It looks a decent strategic fit. That’s because FFEI strengthens Xaar's capabilities and skills, provides a more comprehensive solution for its growing number of original equipment manufacturing and user developer integrator customers, and helps the group capture more opportunities in vertically integrated solutions. This additional capability should also enable Xaar’s customers to reduce their development timescales and shorten their time to market. The team at FFEI is well-known to Xaar’s management, thus mitigating integration risk.

Although the acquisition will be slightly earnings accretive in 2022, house broker Investec is maintaining cash profit forecasts of £3.6m in 2022 on revenue of £61m, reversing an estimated small loss of £0.5m on revenue of £51.1m in 2021. However, analysts Thomas Rand and Ben Bourne note that “given the absolute quantum between our 2021 cash profit estimate and break-even, we see scope for this inflexion [into profit] to occur sooner than forecast”. I agree and feel that this is a good use of part of Xaar’s estimated net cash of £36m (45p a share).

I also see scope for the group’s ongoing recovery, driven by a customer-centric focus and product investment in market segments in which the company has a competitive advantage, to gain significant momentum over the coming years with earnings further boosted by higher utilisation rates, better gross margin and the operational leverage of the business model. The raft of contract awards announced since I suggested buying Xaar’s shares, at 36.4p, in my 2020 Bargain Shares portfolio, adds material weight to this prediction, hence why Investec expects revenue to ramp up to £74m in 2023 and £91.8m in 2024.

On this basis, expect cash profit to surge to £10.9m in 2023 and £18.3m in 2024 to deliver earnings per share (EPS) of 7p and 14.4p, respectively, implying cash-adjusted price/earnings (PE) ratios of 20 and 10. The respective enterprise valuation to cash profit multiples are 10.3 and 6.2, hardly excessive ratings for a recovery stock.

Xaar’s share price rallied 56 per cent to 230p after I last suggested buying at 147p when I covered the annual results (‘Priced to motor’, 26 April 2021), and in the process achieved my 200p target. The price has since pulled back on profit taking and offers another a repeat buying opportunity. Indeed, after factoring in the contribution from the FFEI acquisition, and potential for earnings upgrades, I am raising my fair value target to 220p. Buy.

Note 1. Chenavari Capital Solutions made a compulsory capital redemption of 34.73 per cent of the share capital at 85.72p a share in March 2020, and subsequent compulsory capital redemption of 21.9 per cent of the share capital at 72.93p a share in July 2020. The total return takes into account the capital redemptions. The company delisted its shares from AIM on 30 September at a closing bid-price of 35p. Approximately 17.9 percent of each holding was then redeemed on 9 November 2020 at 65.26p per share, and a further 67 per cent at 44.7p in May 2021. The board plans to make further compulsory capital redemptions in due course.

Note 2. Metal Tiger shares consolidated on the basis of one share for every 10 shares previously held on 1 July 2020.

Source: London Stock Exchange.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].

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