- 39 per cent higher first half revenue of £36.6mn
- First half pre-tax profit of £1.4mn, reverses loss of £1.6mn in 2021
- Net cash of £12.7mn
Cambridge-based Xaar (XAR:210p), a leader in the development of inkjet technology and maker of piezoelectric drop-on-demand industrial inkjet printheads, delivered an eye-catching 14 per cent organic sales growth in the first half, excluding contribution from acquisitions.
It’s more profitable business, too, as highlighted by the sharp rise in gross margin from 31 to 40 per cent, reflecting both the reduction in the cost base in the printhead division and operational gearing as higher volumes have improved profitability. In fact, the group increased gross profit by £6.2mn on £10.3mn incremental revenue in the six-month period, the reason why Xaar moved from barely cash profit break-even in the first half of 2021 to a cash profit of £3mn.
Xaar’s product print systems division delivered 51 per cent higher revenue of £9.2mn, accounting for a quarter of the group total, and trebled its gross profit contribution to £3.6mn, following restructuring and the adoption of a more commercial approach to products introduced in 2021. Analysts at Investec believe it could now be a more material part of the medium-term growth story.
Despite the ongoing challenge of Covid-19 pandemic related lockdown restrictions in China that is impacting the ability of Xaar’s customers to develop, make and install ceramics and glass sector products, the printhead business still reported 2 per cent organic revenue growth as strong sales in North America, Europe and the Middle East more than offset the shortfall in Asia. A clear pricing strategy and sales focus on selling products based on their superior technical merits continues to drive the installed base of customers.
Importantly, the group is actively managing costs and taking the appropriate action in response to global cost inflation. Electricity unit costs are fixed into the first half of 2023, Xaar has invested in raw materials to mitigate against rising costs, and the group has increased the stock of finished goods to strengthen its supply chain and ensure the business can meet customer demand. Where possible, cost increases have been passed on to customers through higher sales prices. Analysts at Panmure Gordon are forecasting closing year-end net cash of £10.1mn, so the balance sheet remains in a strong position.
The direction of travel remains positive with pre-tax profits expected to treble to £4.2mn on revenue of £78.5mn in 2023 to produce earnings per share (EPS) of 5.3p. However, the real upside is expected in 2024 when Investec believe Xaar could deliver over £15mn of pre-tax profit on revenue of £109mn with more than 40 per cent of sales coming from product printing and FFEI, an integrator and maker of industrial digital inkjet systems and digital life science technology. Although Panmure is less bullish for that year, predicting pre-tax profit of £6.6mn on revenue of £82.5mn, it’s strong progress either way.
I first suggested buying, at 36.4p, in my 2020 Bargain Shares portfolio, and Xaar’s share price rallied 10 per cent to a four-year high (275p) after my last buy call (‘On the results beat’, 23 March 2022), coming within pennies of Panmure’s target, before succumbing to profit taking. The ongoing operational performance suggests analysts’ fair valuations of 285p (Panmure) to 300p (Investec) have substance. Buy.
Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.
■ 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 at £16.95 each plus postage and packaging. Details of the content can be viewed on www.ypdbooks.com.
Promotion: Subject to stock availability, the books can be purchased for £10 each plus £3.95 postage and packaging, or £20 for both books plus £5.75 postage and packaging.
