- Sales volumes in printhead business impacted by uncertainty in China
- Higher inventory levels to ensure availability of supply cuts net cash by a third to £8.6mn
- Impact of China disruption and input cost increases lead to earnings downgrades
Cambridge-based Xaar (XAR:179p), a leader in the development of inkjet technology and maker of piezoelectric drop-on-demand industrial inkjet printheads, has exceeded 2022 revenue estimates but has lowered forward earnings guidance materially.
The group delivered organic revenue growth of 9 per cent in 2022, lifting turnover by almost a quarter to £74mn after accounting for the contribution from recent acquisitions, both of which have been successfully integrated. Although the product print systems business delivered 36 per cent sales growth year on year, buoyed by structural and organisational changes, analysts at Panmure Gordon estimate that the larger printhead business only increased revenue by 3 per cent due to ongoing challenges in China, both in terms of sales to Chinese customers and, indirectly, through supply chains used by non-Chinese customers. Xaar’s management team expects the printhead unit to continue to be affected by the issues in China in the short term as the spread of Covid-19 disrupts the reopening of the economy after the country’s zero-Covid policy was removed.
Closer to home, cost inflation (labour and energy) is having an impact, too, prompting analysts at Progressive Equity to downgrade their 2023 pre-tax profit and earnings per share (EPS) forecasts by 44 per cent to £2.5mn and 3.2p, respectively, on revenue of £79.6mn (3 per cent downgrade), albeit this still represents 79 per cent year-on-year profit growth. Working capital build in inventory levels to ensure continuity of supply to customers meant that group net cash fell by a third to £8.6mn in the second half of 2022, although analysts expect it to recover to £11.3mn by the end of 2023.
I first suggested buying the shares, at 36.4p, in my 2020 Bargain Shares portfolio, and Xaar’s share price subsequently rallied to a four-year high (275p) in April 2022. I reiterated the buy advice, at 210p, when I covered the interim results (‘Delivering strong momentum, 20 September 2022), and the share price was just shy of that level prior to today’s trading update.
Although management is making the right strategic moves and has executed a successful turnaround of the business since I initiated coverage three years ago, there is no avoiding the short-term headwinds, nor the scale of the earnings downgrade. Bank the 388 per cent paper profit. Sell.
■ 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 £3.95 postage and packaging. Details of the content can be viewed on www.ypdbooks.com.
Promotion: Subject to stock availability, both books can be purchased for £25 plus £5.75 postage and packaging.
