Bargain shares: A roadmap for recovery

Cambridge-based Xaar (XAR:191p), a leader in the development of inkjet technology and maker of piezoelectric drop-on-demand industrial inkjet printheads, has reiterated full-year guidance in interim results that highlight “a positive short-term outlook with a healthy order book across the business.” Having posted a small cash loss of £0.4m on revenue of £26.3m in the first half, this implies cash break-even on £25m of revenue in the second half ahead of a step change in profitability in the next two financial years. House broker Investec forecasts cash profit of £3.6m and £10.9m, respectively, on revenue of £61m and £74.2m in 2022 and 2023.

Key to achieving these projections is a reinvigorated customer centric focus and new product investment in market segments in which Xaar has a competitive advantage. For instance, today’s launch of Xaar Irix provides customers with a printhead that offers greater image quality at longer print distances in the coding and marking sector. It follows on from April’s launch of Xaar Nitrox, a printhead that enables printing at 100 metres per minute for oil-based inks and other fluids including soluble salts used for printing glass. Importantly, these products have been launched specifically to address end market demand from OEMs.

Xaar’s recent acquisition of Hemel Hempstead-based FFEI, a leading integrator and manufacturer of industrial digital inkjet systems and digital life science technology, has been made for the same purpose. Namely, to grow Xaar’s capability and accelerate customer adoption of its printheads by reducing development timescales for customers and shortening their time to market. 

The renewed focus is working as shown by the printhead unit’s swing from a £0.1m cash loss in the first half of 2020 to a £0.8m cash profit in the first six months of 2021. Sales in Asia surged 30 per cent year-on-year with China (45 per cent growth) leading the growth. Divisional gross margin shot up from 23 to 35 per cent, so it’s more profitable business, too. The relocation of Xaar’s head office to Cambridge Research Park will reduce annual costs by £0.7m, further improving operational leverage.

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

Admittedly, Xaar has experienced issues at its product print systems business, EPS, including project overruns and increased lead times. These are being addressed through a change of personnel and restructuring, albeit a £1m non-cash write-down on slow moving inventory masked strong underlying profitability from a business that boasts a healthy pipeline.

Xaar’s net cash position was down slightly from £18m to £17.1m in the six-month period, but is set to double on the imminent disposal of its 55 per cent stake in its 3D printing business to Stratasys (SSQ:NSQ). House broker Investec is pencilling in a cash payment of £18m which would double Xaar’s net cash to £35.6m (45p a share). Expect the cash pile to hold firm in 2022 as Xaar uses internal cash flow for its investment plans.

The share price rallied from 185p to 260p after I last suggested buying at the time of the FFEI acquisition (‘Bargain shares: Repeat buying opportunities’, 12 July 2021) and in the process achieved my 220p target. I first suggested buying, at 36.4p, in my 2020 Bargain Shares portfolio. The price has since pulled back close to my last entry point (185p) on profit taking which means that Xaar is now rated on an enterprise valuation to cash profit multiple of 9 for 2023, hardly excessive for a recovery stock. I am tweaking my target up slightly from 220p to 230p and continue to rate the shares a buy.

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