It’s risky, but this technology leader with global reach could attract a foreign buyer

Shares in Xaar, the printhead maker, are back at 2014 levels and patient investors may scent an opportunity, says Russ Mould

PILING into a stock after a profit warning is always an exercise that comes with risk, especially as such disappointments tend to come along like buses, in packs and never alone.

Anyone of a nervous disposition may therefore wish to stop reading now, or perhaps wait a little to see if another profit warning emerges from Xaar before they do any further research on the company.

Patient investors who are willing – and able – to suffer losses in pursuit of portfolio gains, on the other hand, may be tempted to have a look now, given that the shares are languishing at levels last seen in late 2014.

Cambridge-headquartered Xaar is a global leader in digital inkjet printing, and provides industrial inkjet printheads and industrial 3D

printing systems, as well as ink systems and services to optimise ink flow.

Client industries include 3D printing, textiles, packaging, ceramics, advanced manufacturing and the graphic arts.

Xaar’s customers are able to customise the printheads to differentiate their services to their own clients, by firing substantially higher volumes of liquid, by operating at much higher speeds, or by laying down intricate and higher-quality designs on different surfaces, such as codes, batch numbers and markers for the packaging industry.

Last year, Asia accounted for around half of the company’s sales, America a fifth and Europe, the Middle East and Africa the remainder, so Xaar truly operates on the world stage.

To foster its competitive position and enable it to sell on the basis of technological edge and not just price, the firm spent £12m, or 12pc of sales, on research and development in 2017.

This is all part of the “Vision 2020” plan laid down by Doug Edwards, the chief executive, who took the helm in early 2015.

The goal was to take sales to £220m by 2020 and then £525m by 2025. These targets have proved tougher to achieve than hoped, however.

Revenue peaked at £137m in 2013, when operating profit topped out at £40m as Xaar capitalised on a boom in demand for printing on ceramic tiles and laminates from China in particular. Since then, the market has begun to move away

from ceramics and Chinese demand has cooled, leaving Edwards and his team to develop new markets and manage the transition towards “thin film” printheads.

These challenges help to explain May’s profit warning as ceramics sales have been slower than hoped in 2018, and adoption rates for new products and technologies are proving unpredictable.

But Xaar has been here before. Product cycles, or demand from particular countries, drove huge rises in earnings in 2006-07 and 2011-13, for example. In the latter case, operating margins reached 29pc (compared with the 8pc-10pc now expected by analysts for 2018), and earnings per share reached 41.9p (against the 9.2p predicted for 2018).

The lowly numbers for this year explain why the stock looks so expensive on nearly 30 times earnings. Any recovery in sales and margins towards the 2013 highs – let alone the 2020 and 2025 targets – would leave the shares looking very cheap.

There are clear risks. Trading visibility is low at the moment and history shows that profits can be volatile – operating profit has fallen year on year nine times and risen eight times since 2000.

But Xaar has a £44.7m net cash pile so it can continue to invest and position itself for the future without having any banks on its back.

This buys management valuable time, which is a good thing as analysts expect a further drop in profits for 2018 and possibly 2019 too, and it means that investors can also afford to be patient.

The next scheduled news is due at the interims on Sept 5.

There is a chance of further nearterm profit disappointment but Xaar could just as easily be targeted by an overseas predator on the hunt for a technology leader.

Questor says: buy Ticker: XAR

Share price at close: 250p

Russ Mould is investment director at AJ Bell, the stockbroker

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