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Xaar’s final results for FY23 are in line with revised guidance. The figures feature adjusted EBITDA at £6.4m (FY22: £6.2m), with good performance from EPS, FFEI and Megnajet. This was achieved despite a weak end market that delayed product debuts and affected H2 23 and Q1 24 revenue. The reported PBT loss of £2.4m reverses last year’s £0.8m profit, but pleasingly Xaar sees no further deterioration. CEO John Mills concludes that while the external trading environment ‘remains challenging’, the product portfolio continues to generate ‘strong interest from customers’. We maintain FY24 forecasts and introduce FY25 estimates. In our view, the medium- and longer-term outlook is nudging better, with the inventory unwind boosting FY24 working capital. Shares have suffered following the November warning (YTD TSR -4.8% vs sector 0.2%), but with no further deterioration the FY print is a calming balm. Some investors might await news of a more favourable backdrop; some will buy the pullback as others are fearful.
Xaar plc
Results summary. FY23 results are in-line with expectations but highlight the impact of external headwinds. Revenues of £70.6m are 3% lower y-o-y, driven by lower Printhead revenues partially offset by strong growth in 3D printing. Gross profit margin contracted 130bps to 38.1% highlighting cost actions while adjusted PBT grew to £2.9m. FY23 net cash of £7.1m (vs. £8.5m in FY22) reflects investment in working capital. Near-term outlook unchanged. Management expects that the weaker demand experienced during Q4’23 will continue into FY24. We assume that the recent weaker demand has been driven by higher interest costs curtailing capital equipment expenditure and delays of customer new product launches, both compounded by current geopolitical disruption. Management has a clear cost plan to navigate current market conditions. Unchanged forecasts. We assume weak trading conditions through H1’24 with modest sequential revenue improvement in H2’24. Lower FY24 volumes and higher cost inventory reduce margins and profitability y-o-y. Multiple future growth opportunities. Longer-term, compelling growth opportunities are emerging as customers continue to validate Xaar technology, evidenced by multiple new product launches scheduled over the next 6-18 months (12 launches scheduled in FY24). Therefore, we are confident in the growth prospects of the group and believe Xaar is well positioned to capture new revenue opportunities and gain market share. Valuation. A positive trajectory in its end markets in H2, complemented by new product launches, should start to de-risk our FY25E forecasts. On this basis, an FY25E EV/EBITDA multiple of 9.0x looks attractive, in our view.
2023 prelims confirm an Adj. PBT of £2.9m (2022: £2.8m) and that it remained in a net cash position following the receipt of a one-off gain of £2.0m arising from the disposal of intangible assets. We will be leaving our 2024 Adj. PBT forecast unchanged at £0.5m and continue to forecast a recovery in 2025 with the EBIT margin in 2025 expanding from 1.4% to 5.5% supporting an Adj. PBT of £3.9m. We re-iterate our BUY recommendation and target price of 190p. Customer interest continues to grow: While current conditions are challenging, our optimism for future growth is based upon the increased number of machine launches. In 2023 it launched 12 machines with a further 12 expected in 2024, up from two in 2019. In addition, its ‘qualified interest’ and bought ‘kit for development’ segments increased from 8 to 86 and 3 to 73 respectively during the period 2019-2023. The key will be to convert this interest into further machine launches but it clearly demonstrates the enhanced level of customer interest in its digital printheads and the potential to grow revenues in a market currently valued at c£1bn. Bodes well for 2025 and beyond: As a reminder, the reason for the delay between machine launch and recognising material revenues revolves around the fact that even though a customer has ordered digital printheads it still take two-three years of testing before the printer is commercially ready as all the other components of a digital inkjet printer (i.e. the inks, the ink supply system and electronics) have to be integrated and tested on the substrate. Consequently, revenues in any one year reflects the pace at which new orders are placed two-three years previously. This is what we are currently seeing in 2023 and 2024 as the P&L reflects the machine launches in 2019/20 which were just two and six respectively. With 12 machine launches in 2023, it bodes well for our 2025 and 2026 forecasts. Ability to handle more challenging inks: Xaar’s focus is to accelerate the shift away from analogue printing to industrial digital inkjet printing which has a wider range of applications. Xaar’s USP is that it can handle more challenging inks which have a viscosity of up to 100 centipose (cP) compared to the competition which can currently handle only 25cP. This means a larger range of ‘thicker’ fluids/inks can be ‘jetted’ which have less water content leading to less drying time and lower energy costs. Furthermore, it leads to a better quality finish, a more intense colour/pigmentation and does away with the need to use a primer leading to further cost savings. Now operating in multiple sectors: The question for Xaar is how quickly it can return, or get somewhere near to its 2013 peak when it reported revenues of £134m, an EBIT margin of 30% when it operated in just one market sector (i.e. Ceramics). In contrast, in 2024 we expect it to report revenues of £75m and an EBIT margin of 1.4% despite operating in multiple sectors (3D printing, Polymerjetting, Wax Printing and Advanced Manufacturing). This is despite the fact production capacity remains essentially unchanged. EBIT growth highly sensitive to the margin: While we expect the EBIT margin in 2025 to expand to 5.5% following improved revenues and cost cutting initiatives, the margin still remains some way behind its peak level of 30% in 2013. Whilst not forecasting a return to this level, we calculate that every 100bp increase in the EBIT margin equates to an approximate additional £1m in EBIT illustrating material upside potential to our forecasts. As such, Xaar remains on the right track and with the management team having successfully re-engaged with the customer base we should start to see an uplift in earnings.
Xaar has reiterated the message from its November trading update, with both revenue and profit expected to be within the previously announced ranges (£70-72m and £2.5-3m, respectively). Cash of £7.1m at 31 December 2023 is ahead of management expectations and significantly up on the £3.7m reported at 28 November, which we assume is due to a combination of working capital improvements and tight control over costs. The outlook for FY24 ‘remains as stated in the November update’; at that time, the tone was cautious, with weaker demand in Q4 23 expected to continue into 2024. We take comfort from the strong cash flow late in the year, performance otherwise as anticipated in the November update and unchanged guidance around FY24.
FY23 as expected, guidance unchanged. Management highlights that trading in the final month of FY23 was as expected and therefore FY23 revenue and profit is expected to be in-line with the guidance given in the trading update on 29 November 2023 (FY23 revenues of £70-72m and adjusted PBT of £2.5-3.0m). Encouragingly, the FY23 year-end net cash position is better than expected at £7.1m (INVe £5.7m) – we suspect due to a combination of tighter working capital management and cash/cost control actions. Additionally, management comments that its FY24 trading outlook is unchanged from that stated in the November update (full details in our commentry made then: Growth pipeline expanding despite ST headwinds). Multiple future growth opportunities. Longer-term, compelling growth opportunities are emerging as customers continue to validate Xaar technology, evidenced by multiple new product launches scheduled over the next 6-18 months. Therefore, we are confident in the growth prospects of the group and believe Xaar is well positioned to capture new revenue opportunities and gain market share. Valuation. A positive trajectory in its end markets through the course of this year, complemented by new product launches, should start to de-risk our FY25E forecasts. On this basis, an FY25E EV/EBITDA multiple of 8.9x looks attractive, in our view. Next catalyst. FY23 results are expected to be published on 26 March 2024.
The opportunity for Xaar is significant with machine launches incorporating its innovative printhead technology at a five year high. Given the two-three year lead time between machine launches and meaningful revenues, we expect to see step changes in profitability commencing in 2025 after a period of low profitability. We forecast Adj. PBT to grow from £0.5m in 2024 to £3.9m in 2025 with the EBIT margin expanding from 1.4% to 5.5% and for Xaar to remain in a net cash position. We re-iterate our BUY recommendation though lower our target price to 190p (251p) to reflect the lower growth expectations in 2024 following the recent trading update. Xaar is offering something new: The key to Xaar’s success and its ambition to be the number one supplier in digital inkjet printheads is the ability to develop groundbreaking technology to handle challenging ‘high viscosity’ inks of 100 centipose (the competitions’ printheads are only 25 centipose), across a range of different substrates. The benefit of these inks is that it leads to better quality finishes, lower energy costs, more applications and reduces the customers' time to market. Increased customer interest: The number of machine launches has increased from two in 2019 to 16 in 2023. However, what is most pleasing is the exponential increase in the ‘qualified interest’ and bought ‘kit for development’ segments increasing from 8 to 127 and 3 to 58 respectively during the period 2019-2023. The key will be to convert this interest into machine launches but it clearly demonstrates the increasing level of customer interest in its digital printheads and the potential to grow revenues. Building earnings momentum: Of the 16 disclosed machine launches in 2023, there are a number which show significant potential in new sectors e.g. 3D printing, Polymerjetting, Wax Printing and Advanced Manufacturing. The success or otherwise of these launches will most likely not materialise in our forecasts until 2025 at the earliest. While Xaar is right to be cautious on its immediate outlook, it should not detract from the medium term opportunity in a market valued at c£1bn. Operationally leveraged: It should also be borne in mind that whilst we expect the EBIT margin in 2025 to expand to 5.5%, the margin still remains some way behind its peak level of 30% in 2013. Whilst not forecasting a return to this level, we calculate that every 100bp increase in the EBIT margin equates to an approximate additional £1m in EBIT illustrating material upside potential to our forecasts.
FY23 ahead of expectations. Despite FY23 revenue expectations being below previous expectations, driven by a weakening of demand through H2’23, profits are ahead of expectations. Management guides to FY23 revenues of £70-72m (vs. INVe of £79.1m) and adjusted PBT of £2.5-3.0m (vs. INVe of £2.3m). The profit beat is driven by mix, new product launches and cost efficiencies. The Group maintains a strong balance sheet with net cash of £3.7m as at 28 Nov, in-line with management expectations. Based on current trading and management guidance, we lower our FY23E revenue by 10.2% to £71m while increasing our FY23E adjusted PBT by 21.7% to £2.8m. FY24 expectations moved to FY25. Management expects the weaker demand experience during Q4’23 will continue into FY24. We assume that recent weaker demand has been driven by higher interest costs curtailing capital equipment expenditure and delays of customer new product launches, both compounded by current geopolitical disruption. Given this, we expect weak trading conditions through the H1’24 with modest sequential revenue improvement in H2’24, giving our new FY24E revenue of £75m (from £90.2m). Lower than expected volumes and the selling inventory built at higher input costs drives a reduction in margins, resulting in our new FY24E adjusted PBT of £0.3m (from £5.1m). Our changed assumptions effectively move our previous FY24E forecast out one year to FY25E Future growth confidence. Compelling growth opportunities are emerging as customers continue to validate Xaar technology, evidenced by multiple new product launches scheduled over the next 6-12 months.
Xaar has released a trading update for 2023 that includes cautious commentary around 2024. The group is expecting a strong end to the year in terms of profitability, albeit with depressed revenue levels. Sales pressures are expected to continue in 2024 and, combined with downward pressure on prices and cost inflation, are likely to lead to a materially reduced level of profitability. We alter our estimates for both years to reflect the update. Although the group is clearly navigating tough markets, we continue to see long-term value in the new products and markets that recent investments have delivered.
Xaar recently held a product demonstration event, targeted mainly at customers and its expanding ecosystem. The day was well-attended, with demonstrations of both the theory and the practical reality of Xaar’s technologies. We came away reassured of the group’s strong position in multiple, diverse markets. Adoption of new technologies always takes time, but once embedded these platforms seem destined to provide value-for-money, environmentally friendly printing across a wide range of use cases.
Xaar’s results for the six months to 30 June show strong strategic progress. Despite a difficult trading environment, H1 performance was in line with expectations and management is confident that it is on track to meet FY23 guidance. Revenue in H1 23 was down 6% to £34.5m due to a combination of economic conditions and a strong comparative in the prior year. Adjusted profit before tax for the period was up 29% to £1.8m, benefitting from the sale of non-core IP, and the gross margin remained steady at 40%.
Positive H1 results. Despite turbulent trading conditions and geopolitical uncertainties, Xaar delivered an in-line performance. Revenue fell 6% y-o-y to £34.5m and gross profit margin was flat y-o-y at 40% despite inflationary pressures and temporary factory closures, while adjusted EBITDA increased by 17% to £3.5m supported by favourable sales mix and stringent cost management, and adjusted PBT increased 29% to £1.8m which was in line with expectations. The balance sheet remains in a robust position with £7.3m net cash following a period of working capital investment. New product launches instil confidence. Xaar is beginning to reap the benefits of its continuous R&D investment (typically 8-10% of revenue) as customers validate Xaar technology with an anticipated 16 new customer product launches in H2’2023. With clear visibility on its customers’ scheduled new product launches, we believe our FY23E forecasts are de-risked. Compelling opportunity in 3D-Printing. Xaar has a 2% market share of the £200m high viscosity 3D printing market. A number of opportunities are emerging in 3D-printing, most notably (for Xaar) in wax printing. Xaar offers the competitive advantage of printing high viscosity fluids at high temperatures with increased resolution and throughput. With multiple customer product launches planned in the next 6-12 months, 3D-printing is expected to account for a significant component of the group’s future growth. Outlook. Despite positive momentum continuing into H2’23, we make no change to forecasts as we remain cognizant of the wider macro uncertainties. We are confident in the long-term prospects of the group and believe Xaar is well positioned to capture new growth opportunities and gain market share.
Xaar’s trading in H1 23 remained steady, with adjusted profit buoyed by the sale of non-core IP. We would hope that this might allow upward revisions to forecasts, but hold back for now pending full H1 results in September when the pace and scale of the expected recovery in trading with China will be more apparent. Despite a slight decrease in revenue to £34.7m (H1 22: £36.6m), reflecting current economic conditions, we anticipate FY23 overall will benefit from the China reopening, as well as the increase in customer product launches that are expected to drive demand across H2.
Positive H1 trading. H1 performance was in-line with expectations. Revenues fell 5.2% y-o-y to £34.7m, as anticipated (strong Q1’22 driven by China). Adjusted profit before tax also delivered an in-line performance, with the sale of £1.8m non-core IP assets helping to offset the impact of factory re-organisation. There was an improved performance in the Product Print Systems divisions where both revenue and margins increased. The balance sheet remains in a robust position with £7.3m net cash (H1’22: £12.6m), following a period of working capital investment as previously flagged. FY23 forecasts underpinned. Despite macroeconomic and geopolitical uncertainties, the Board anticipates delivering on full year expectations. H1 revenues are in-line with our H1/H2 44/56 weighting estimate. We therefore leave our forecasts unchanged but see potential tailwinds emerging, such as a potential H2 recovery in China (c10% of revenues) where market conditions are expected to improve, maiden revenues from new products launched, and the benefits of operational efficiencies. Strong growth opportunities. We remain confident in the long-term improvement of the business model and believe Xaar is well-placed to capture growth opportunities, through multiple product offerings in potentially large new markets. This growth potential is underpinned by the launch of Aquinox, for example, with customer trials validating the significant benefits of this offering, with some customers already opting to design it into their next generation of products. Improved performance in the Product Print Systems business is encouraging and the recent commercial partnership with Quantica strengthens Xaar’s position in the highly viscous fluids market. Therefore, we anticipate accelerating revenues and profitability over the coming years. Next catalyst. H1 results due on 19 September 2023.
Xaar has delivered a strong FY22, in line with our expectations (or better) at all levels of profitability and with good cash generation. We make no changes to our FY23 revenue and profit estimates; a strong reopening of China could prompt upgrades but is likely to take time, and a general macro caution precludes our taking action at this point. We look forward to further positive developments as the year progresses, notably around the new Aquinox product, and hope to introduce FY24 estimates as global market conditions become more predictable in coming months.
A year of delivery. FY22 results are in line with expectations. Revenues of £72.8m represented 23% y-o-y growth, driven both organically (+8%) and by acquisitions. This highlights the strong momentum across the Group, largely offsetting the impact from Covid-19 restrictions in China. Gross profit margins improved by 500bps to 39% and the Group returned to profit, while continuing to invest in the business. Adjusted EBITDA nearly doubled to £6.2m and adjusted PBT moved into positive territory at £2.8m. Net cash of £8.5m (vs. £25.1m in FY21) reflects acquisitions and investment in working capital. Enhancing the business model. Further operational and strategic progress has been made (expansion of vertically integrated product range, factory reorganisation completed, successful FFEI/Megnajet acquisition integration). FY23 expectations unchanged. Despite macroeconomic and geopolitical uncertainties management expects to make further progress in FY23, in line with expectations. We therefore leave our forecasts unchanged but see potential tailwinds emerging, such as a potential H2 recovery in China (c10% of revenues), maiden revenues from new products, and the benefits of operational efficiencies. Strong growth opportunities. We remain confident in the long-term improvement of this business and believe Xaar is well-placed to capture growth opportunities, through multiple product offerings, in potentially large new markets. This growth potential is underpinned by the launch of Aquinox, for example, with customer trials validating the significant benefits of this offering, with some customers already opting to design it into their next generation of products. Therefore, we see revenue potential within a year and accelerating revenues by FY25 - underpinning our FY25E forecasts.
While 2022 revenues were slightly below our expectations, this was more than offset by much stronger operating performance. Gross margin at 39% was 530bps above 2021 and well above our expectation of 36%; this translated to an adjusted operating margin of 4.4% compared with our expectation of 2.1%. If our forecasts for 2023 are largely unchanged it is only because it is difficult to argue if 2023 will be much different to 2022 when the strength in the US was partly offset by Chinese demand. However, we maintain our BUY recommendation and TP of 251p in the knowledge that a rapid upturn in China, for which the company is well positioned, and the benefits of operational efficiency at Huntingdon site are not fully reflected in our estimates. Moreover, a strong balance sheet with cash of £8.6m at end-22 despite the investment in working capital of £12.2m provides opportunities not afforded to competitors with weak balance sheets.
The turnaround of Xaar in recent years has been driven by effective and clear management action. The business has been stabilised and realigned with its markets, new products released, and small but strategic acquisitions made. In amongst all this, it is easy to overlook the underlying technology, particularly how it compares with the competition and the opportunities that lie ahead. With the business on the front foot again, we highlight how the structure and design of Xaar’s printheads provide competitive advantages in overcoming the key challenges faced in several of the areas that make up the company’s $1bn addressable market opportunity.
Xaar’s update for the year ended 31 December 2022, issued today, states that revenue is expected to be c.£74m and adjusted PBT ‘on track’. This revenue figure is slightly ahead of our estimate but more importantly 24% ahead of the prior year, with much of this growth having been organic. We adjust our expectations for FY23 to reflect an element of ongoing caution on China, as well as cost increases across the business. However, with its aqueous printhead, Aquinox, successfully launched and the factory reorganisation expected to be complete by March, Xaar remains on the front foot from strategic, operational and financial perspectives. Nothing has fundamentally changed within the business – our new outlook for FY23 is more prudent, but hopefully allows for strong growth in FY24 estimates, which we expect to introduce with results in March.
A strong year. FY22 trading is in-line, with revenues expected to be c£74m, representing 24% growth driven both organically (+9%) and by acquisitions. The Group is on track to deliver adjusted profit for the year while it continues to invest in the business. Our FY22E forecasts are unchanged except for a £1.9m downward adjustment to net cash to reflect investment in working capital. Net cash was £8.6m at year end. Enhancing the business model. Further operational and strategic progress has been made (Aqueous launched, factory reorganisation commenced and on track for completion by March, and the FFEI and Megnajet acquisitions have been successfully integrated). We trim our FY23E adjusted PBT forecast by £0.24m given uncertainty in China reopening due to Covid cases increasing – therefore impacting Printhead sales. Recalibrating outer-year forecasts. With the transfer of analyst coverage, we inject some caution into our above-consensus FY24E estimates given macro conditions delaying the rate of progression. However, we believe FY25E will broadly reflect our original FY24E estimates. We forecast adjusted PBT increasing to £14.9m in FY25E compared to our new FY24E forecast of £5.1m. Full details of our forecast changes are overleaf. Positive growth outlook. We are encouraged by the successful launch of Aqueous last November and remain confident in the long-term improvement of this business. We believe Xaar is well-placed to capture growth opportunities in potentially large markets. Next catalysts. We look forward to visiting the site in Huntingdon on 21 February. FY22 results are due on 28 March.
2022 revenues are now expected to be marginally ahead of our expectations, equivalent to year-on-year growth of 24% driven by a combination of organic growth of 9% and acquisitions. While this has reduced the growth required to meet 2023 revenue expectations from 7% to 5%, it is too early to contemplate any change to our revenue estimates. China may have reversed its Zero-Covid policy, but any hopes of full and orderly reopening have been quickly diminished by rising Covid cases. Indeed, Xaar anticipated this and maintained higher levels of investment in inventory during H2/22 thanks to a strong balance sheet. However, it’s prudent to assume that the loss of short-term momentum will reduce recovery of cost inflation, so we have cut our PBT forecasts for 2023-24 by c£2m. This reduces our DCF-derived TP by 12% to 251p. However, we maintain our BUY recommendation given the long-term drivers.
Xaar announced on Wednesday the release of its Aquinox printhead for use with water-based inks. This is a major step forward for Xaar and for aqueous inkjet printing. Aquinox is the latest printhead to work on Xaar’s ImagineX platform and helps open up new markets, most notable packaging and textiles. It also enables Xaar to take advantage of increasing demands in other markets, notably ceramics.
The interim results for the six months ended 30 June 2022, released today, provide further evidence that Xaar is back on a growth path. H1 22 revenue was up 39% on H1 21 and 11% on H2 21. Organic growth was a very impressive 14% H1 on H1. These figures actually mask even stronger underlying progress, as the Printhead business was significantly constrained by the continued Covid-19 lockdown restrictions in China. Xaar is on track to launch its new aqueous printhead product in Q4 2022. The recent FFEI and Megnajet acquisitions are performing well, and all business units delivered positive adjusted EBITDA in the period.
1H outturn: Revenue grew 39% y-o-y to £36.6m, 10% ahead of our £33.3m estimate and represents 14% y-o-y and 9% h-o-h organic growth. Gross profit increased 75% y-o-y to £14.5m, 15% ahead of our estimate on strong Printhead margins and were extremely strong in Product Print. Gross profit margin increased 900bps y-o-y and 400bps h-o-h to 40%, mostly driven by operational efficiency improvements. All businesses delivered positive adjusted EBITDA, marking a key inflection point for Xaar. Input cost inflation has been successfully mitigated through higher selling prices. Investment increased in inventory of both components and finished goods, as expected, reducing net cash to a still healthy £12.7m (we had £13.0m). Printhead growth held back by Chinese bottlenecks: Printhead volumes continued to recover as previous customers returned and new customers further engaged in new machine designs. Overall volume growth was only 2%, with growth in Europe (+7% y-o-y) and North America (+26%) mostly offset by weakness in China (-22%) due to on-going Covid-related disruption. Coding & Marking and Additive Manufacturing were the strongest end markets. Product Print restructuring drives material growth: The 2021 restructuring is delivering, with revenue up 51% y-o-y and gross margin doubling to 39%. This segment could now be a more material part of the medium-term growth profile. Aqueous printhead launch set for 4Q22: We believe this new product could, in time, be a key growth driver for Xaar. The on-track launch in mid-4Q22 (we assume November) follows a year of beta testing with key partners. Huntingdon clean room restructuring: During 1Q23, the Huntingdon site will close for two months to undergo a significant modernisation. We reflect this disruption in our FY23E profit forecasts, but leave FY24E unchanged.
This morning’s interim results confirm the upward shift in momentum, with the income statement registering YoY revenue growth of 39% (14% on an organic basis) and an underlying profit before tax for the second successive half-year period. More important, the outlook of being “on track to deliver a full year profit for 2022 in line with market expectations” looks comfortably within grasp as it entails a flat H/H revenue growth and break-even at the PBT level in H2/22. If we were tempted to raise our 2022 forecasts, we were promptly reminded that no company is totally immune from the multiplicative effects of a broad-based recession, exacerbated by the continued uncertainty over China’s strict COVID policies. However, as management has given itself every chance of sustaining the momentum by utilising its strong balance sheet to invest in its capabilities and supply chains, we see no reason not to maintain our BUY recommendation and an unchanged TP of 285p.
Xaar’s H1 trading update for 6M ended 30th June 2022, issued yesterday, confirms that the group is trading well, with increased revenues, improving margins, costs under control and new products launching to schedule. Xaar is clearly back onto a robust growth trajectory. We are maintaining our forecasts and look forward to the interims in September as an opportunity find out more about how the momentum is building.
Interim pre-close update – FY22 profit expectations unchanged Xaar continues to make strong progress in increasing printhead volumes sales and vertically integrating its expanding portfolio of products and services. Revenue in the six months to 30 June rose by 14% in organic terms (+41% reported) to circa £37m (above our £34m estimate). We cautiously leave our forecasts unchanged despite the better-than-expected revenue growth given the macro and Covid-related uncertainty heading into 2H22. We see scope for FY upgrades if momentum can be maintained. Importantly for future growth prospects, the new aqueous printhead remains on track for 4Q22. Strong printhead volume growth in Europe and the US more than offset slower sales in China due to Covid-related lockdowns. While Chinese restrictions have eased, the outlook for 2H22 remains uncertain with potential for further lockdowns. The new printbar product, Xaar Versatex, has successfully been launched in the period. The refreshed printbar solution, developed by FFEI (acquired in July 2021), allows customers to digitalise existing installed analogue printing machines with the added ability that Xaar printheads can jet higher viscosity inks than its competitors. The EPS division continues to benefit from the restructuring in 2021 with strong revenue and margin growth. Cost inflation being passed on Additional investment has been made in inventory of both components and finished goods to provide further supply chain resilience. We understand there has been little improvement in component supply with prices remaining at elevated levels. Selling prices of certain products have been increased to offset the ongoing cost inflation with additional benefit from internal cost saving and efficiency initiatives. Net cash of £12.6m provides growth capital The acquisition of Megnajet (c. £3.6m in March 2022), capex, and working capital investment have reduced net cash to £12.6m (FY21 £25.1m). The further investment in inventory looks sensible given the continued disruption to global supply chains. There remains sufficient firepower for further bolt-on M&A as Xaar transitions to PBT profitability this year.
This morning’s trading update for the first half of the year further crystallises our view that Xaar has shifted to a higher gear. H1/22 revenue is expected to have increased by 41% YoY, or 14% on an organic basis. With most of the West in recession and the uncertainty over China’s strict COVID policies, we are minded to keep our full year revenue growth forecast of 24% unchanged, although some readers may conclude this is excessively cautious as it implies a flat H2 over H1. Indeed, management has given itself every chance of maintaining the momentum by investing around £11m in capacity, supply chain resilience and vertically integrated capability during H1/22. What use is a strong balance sheet if it’s not being utilised to differentiate in a generally tough economic environment?
With a clear roadmap of new digital inkjet products and an ambitious management team focused on gaining (or retaining) significant market shares across the segments that make up its $1bn addressable market, Xaar is positioned to grow strongly. Management has already demonstrated its abilities in turning the business around, and we believe it is far from clear that the share price fully reflects the opportunities ahead.
FY21 outturn: Revenue increased 12% organically y-o-y and gross margins improved 700bps to 34.1% (490bps ahead of our estimate) as higher printhead volumes drove improved overhead recovery. Sequentially improving revenue was seen in the key end market of Glass and Ceramics (+38%). All businesses contributed positive EBITDA, including the restructured EPS division. Adjusted EBITA (on our basis) was £0.5m ahead of our estimated loss at £1.9m. Adjusted LPS was 27% better than our estimate at -0.7p. Net cash was in line at £25.1m. Re-engaged customers: Xaar continues to gain traction with its expanding customer base. Previous customers are coming back and new customers are attracted by the unique capabilities of Xaar printheads. The management team have rebuilt the customer and product pipeline, and are now more confident in Xaar’s ability to convert these into increased printhead volumes over the coming years. We are encouraged by the increasing linkage between new products and the addressable markets, which we understand combine to be over £800m within the next three years. Outlook: FY22 has started well, in line with management expectations. Supply chain issues in 2H21 have been resolved with higher inventory levels (£9m invested in FY21), with Xaar now holding enough components to meet its 2022 production expectations. The Magnajet acquisition is integrating well. Sustainability targets: Xaar has set out its new sustainability roadmap. Forecasts: We upgrade our revenue estimates to reflect the increasing momentum and reflect the better-than-expected FY21 gross margin base year. Higher cost expectations currently offset these to leave EPS estimates unchanged in FY22E and FY23E. New TP: We move to use CY24E as the basis for our TP, up 55p to 300p.
We are upgrading our revenue forecasts for 2022-23 by 10-14%, representing a CAGR of 15% over the 2021-23 period. This reflects strong momentum in the Printhead business as well as a strong rebound in the Product Print Systems (EPS) division. More importantly, gross margins are also improving significantly faster than we had expected and the 40% medium-term target is now well within grasp by 2024. As we asserted in our January note, Xaar is still in the early stages of leading the shift to digital industrial printing and investors should continue to expect more positive surprises. Whilst the continuing investment in R&D and marketing has kept our PBT and EPS estimates for 2022-23 largely unchanged, the acceleration in revenues and gross profits has brought forward expected free cashflows in our DCF model, thus raising the TP to 285p (250p). We maintain our BUY recommendation.
Xaar continues to develop its vertically integrated strategy to provide a onestop-shop solution to help customers accelerate adoption of digital inkjet printing. This morning, it has announced the acquisitions of two businesses that will broaden its capability in industrial ink management and supply systems, and allow it to offer a more integrated inkjet solution. Moreover, at 5.7x pre-tax profit, the multiple paid covers most downside risks but still leaves the balance sheet with sufficient cash to boost the growth strategy. While these transactions are earnings enhancing, and reflected in our revised forecasts, we have kept our TP of 250p unchanged as we remain cognisant of continuing disruption to trading from COVID in China and also recent geopolitical tensions. We maintain our BUY recommendation.
Megnajet: Xaar has acquired Megnajet Ltd and Technomation Ltd, which both trade together under the name of Megnajet. The combined businesses are a leading designer and manufacturer of industrial ink management and supply systems for digital inkjet. More integrated offering: We believe these acquisitions accelerate Xaar’s strategy to be able to provide a fully integrated inkjet solution and move it closer to being able to offer a full printing ecosystem. This could, in time, drive a reduction in printing machine development timescales and shorten the time to market, providing Xaar with increased printhead volume and revenue visibility. Up to £4.0m total cost: Both business have the same acquisition cost, with the initial cash consideration for each being £1.8m, with an additional £0.2m per business of deferred consideration to be paid in two years’ time. Therefore, the cost is £3.6m upfront and £0.4m in two years’ time. For the year ended 28 February 2021, Megnajet generated PBT of £0.3m, and for the year ended 31 January 2021, Technomation generated PBT of £0.4m. We estimate combined annual adjusted EBITA of circa £0.8m, implying an EV/EBITA multiple of only 5x. The acquisition is expected to contribute annualised revenue of circa £3m, giving an impressive EBITA margin of 26%. Forecasts: We add £2.5m (10 months’ contribution) to our FY22E revenue and £3.1m in FY23E. We add a combined adjusted PBT contribution in FY22E of £0.6m and £0.8m in FY23E, the latter an 11.6% upgrade (see figure 1). Our TP reduces to 245p: A de-rating of our international peer group FY23E EV/EBITDA multiple more than offsets our upgraded earnings to reduce our TP by 35p to 245p. We reiterate our Buy and are increasingly confident in the profit recovery profile. FY21 prelims expected in late March.
Momentum building: FY21 revenue is expected to be c.£59m, up 12% organically y-o-y. This is £8m ahead of our estimates although we only had a minimal FFEI revenue contribution, which actually contributed c.£6m. The underlying £2m beat was driven by improving ceramics/glass printing volumes where Xaar is re-gaining lost market share is ceramic tile printing and winning new customers in glass printing. 2H21 profit beat: The higher revenue and cost reduction initiatives are expected to deliver a positive adjusted PBT in 2H21 (we had a £1.6m loss). FFEI: Is contributing well to the growth strategy and broadening the product/service offering. We anticipate further bolt-on M&A in 2022 given the net cash balance sheet (£25.2m at YE) to further develop Xaar’s product portfolio. Product Printing restructure: The EPS business is benefitting from the operational and management changes made in 2021, leading to stronger conversion of the sales pipeline and giving upside risk to our assumptions. Components secured: Xaar has now sourced enough components to deliver its expected 2022 volumes. It has paid a higher than normal price for many of these but is increasing prices to recover these costs. Approximately £7m has been invested in higher inventory levels to guarantee product availability. It has also re-engineered some product designs to take alternative components. Forecast upside: We increase our FY21E revenue and upgrade our adjusted PBT to a lower loss (now £2.4m from £4.3m). We cautiously leave our FY22E profit estimates unchanged on concerns around Omicron impacting its Chinese customer operations and the timing of cost inflation recovery. The momentum in key growth end markets, especially ceramics and 3D printing (in addition to Stratasys volumes), is providing material upside risk to our FY23E and beyond revenue assumptions. We maintain our 280p TP.
We are not surprised to learn this morning that H2/21 revenues were 11% ahead of expectations or that turning a profit in H2/21 was a year ahead of target. Nor are we bowled over by net cash at end-2021, at £25.2m, being £9m ahead of our expectation. The foundations for today’s positive announcements were laid in early 2020 when the current management team came together and recognised the potential to rebuild and transform Xaar. Investors should be prepared for more “beats” as Xaar is still in the early stages of leading the shift to digital industrial printing, as described in our note last week. However, we are cognisant that COVID is still disrupting activity, particularly in China, and hence we are leaving our P&L forecasts for 2022-23 unchanged. The higher-than-expected net cash, however, increases our DCF-derived TP to 250p (231p).
If any company can bring down the economic barriers and accelerate the shift to digital industrial printing, then surely Xaar is a leading candidate. A vertically integrated strategy allows unmatched printhead innovations to broaden the use of challenging inks in key verticals but also leverage a much wider customer base looking to develop bespoke solutions in half the normal development times. The cumulative benefit of the growing installed base will only feed through to our estimates from FY24 but with digital accounting for just 3% of the total printing market there are no immediate barriers to how large the addressable market could become. The recent slump in the share price offers a great buying opportunity.
3D sale: Xaar has conditionally agreed the terms of the accelerated sale of its remaining 55% stake in Xaar 3D to Stratasys. The deal is more complex than the original $33m flat fee plus up to $10m in royalties. The new deal spreads the cash payments out over multiple years and if all paid could total $33.8m (or c. £24m) over 15 years. We had assumed a revised one-off payment of £18m in 2H21E. Cash timing: There is an initial cash payment of $12.8m on exercise of the revised call option. A further $4.6m is payable in three instalments subject to Xaar 3D hitting revenue milestone (we assume broadly equal payment in FY23-25E). A cap on the royalty payments has increased from $10m to $16.4m and over an extended 15 years (rather than the original 10 years).The royalty rate has increased from 2% to 3% of gross revenue of Xaar 3D related products. Forecasts: There is no P&L impact from this new agreement. From a cashflow perspective, we assume the $12.8m (or c. £9.5m) is paid in 2H21E, then £1m in FY23E and FY24E, plus £1.4m in FY25E. The remaining potential cash payments are beyond our forecasting period. Removes a distraction: Xaar management have spent a lot of time this year on getting this deal over the final hurdle. They can now double down their focus on the organic investment opportunities and further M&A. Cautious outlook: As we highlighted in our note Irix-istible self-help’ on 14 September, there are near-term challenges from increased Asian Covid-19 disruption that held back a more positive view on 2H21. Recent news flow on the important Chinese construction market (for ceramic tiles) and power shortages have not diminished these concerns. Beyond the next 12 months, the medium-term opportunity from delivery of the 5-year strategy remains significant and firmly in place. Our TP remains at 280p and we reiterate our Buy.
Xaar has accomplished a key plank of its strategy by conditionally agreeing terms to speed up the sale of its 55% interest in Xaar 3D to Stratasys, its minority partner. With significantly greater strategic and financial commitment to Additive Manufacturing, Stratasys is best placed to develop Xaar 3D, leaving Xaar to focus on developing its core competences in digital inkjet printing while retaining the option of sharing in Xaar 3D’s success and supplying printheads. In addition to the initial consideration of US$12.83m (£9.2m), expected to be paid in a month, the revised agreement also includes earn-out payments totalling US$4.63m and an improvement in initial earn-out and royalty rate terms. While there is no change to our forecasts and DCF-derived TP of 231p, today’s news removes the risk of further cash demands from Xaar 3D on Xaar’s balance sheet. We retain our BUY recommendation.
1H outturn: Revenue was £2.9m ahead of our expectations, at £26.3m, up 20% y-o-y on strong growth in several end markets, especially Ceramics and Glass. Investment in capacity and capability has increased costs as expected and profits were in line with our estimates. Management have prudently taken a £1.0m non-cash impairment in the EPS division above the line. This is for obsolete inventory following a new EPS management team being put in place. Underlying results without this impairment would have been materially better and ahead of our forecasts. We continue to forecast a positive EBITDA inflection in FY22E. Printhead volumes and capacity utilisation: The 1H revenue beat was driven by recovering Ceramic volumes into Asia as previous Xaar customers re-engage. Other end markets were broadly as expected (see figure 1). New Irix products: These new Printhead variants are targeting Coding & Marking end markets and, while not expected to ‘game changing’ in our printhead volume growth assumption, they show delivery of the new product roadmap remains on track. More encouragingly for us is the recent delivery of aqueous printhead variants to Alpha phase testing partners. We estimate first commercial sales of these aqueous printheads in FY23E. Cash generation/balance: Inventory levels increased by £2.7m on higher safety stock of key components given current shortages. Finished goods increased as several deliveries were delayed by Covid-19 restrictions in Asia. Net cash was £17.1m, broadly as we estimated, and provides sufficient M&A firepower. 3D sale: Advanced negotiations continue with completion anticipated in 4Q21. Cautiously optimistic outlook: Near-term challenges from increased Asian Covid-19 disruption hold back a more positive view on 2H21. The medium-term opportunity from delivery of the 5-year strategy remains firmly in place. Despite the strong share price performance, we see further re-rating potential.
A strong balance sheet has ensured that there is no slowing in the pace of the transformation despite the challenges posed by supply chain issues, including COVID-related factory closures and shortages of semiconductors. Management has been able to focus on securing supply of components to eliminate any interruption to the supply of printheads in 2022 while at the same time increasing R&D and capex spend. Given the short-term uncertainties, there is no change to our forecasts and DCF-derived TP of 231p. However, the continuing growth in customer base and new products implies significant upside risk, hence we retain our BUY recommendation.
H1/21 revenue growth of 11% and 8% compared with H1/20 and H2/20, respectively, represents the first tangible evidence that the transformation plan instigated by the current management is bearing fruit. Indeed, for a company that was alienating customers and losing revenues until 2019 this is a rapid turnaround and has vindicated management’s faith in Xaar’s distinctive capabilities in bulk printhead technology which were hitherto unexploited. We now believe that gross margins will rise more quickly in the FY21-23E period, thus providing greater visibility on free cashflow. Therefore, we revert to a DCF valuation, which at a terminal growth rate of 3% and a WACC of 8% generates a TP of 231p as opposed to 176p based on a sum-of-the-parts model previously. We maintain our BUY recommendation.
Interim pre-close update Trading during the last few months has been as management expected and the overall profit performance during 1H21 has been in line with the Board’s expectations. 1H21 revenue is anticipated to be circa £26m, up 11% y-o-y and 8% h-o-h. This revenue run-rate is slightly ahead of that needed to achieve our FY21E estimate of £51.1m, giving scope for revenue upgrades as we progress through 2H21. Increasing Printhead capacity utilisation The Printhead business performed as expected with volumes rising on the launch of ImagineX and the new Nitrox printhead in April. We see increasing printhead volumes and capacity utilisation as the key profit driver over the next three years. Previous customers continue to re-engage and new customers are attracted by the refreshed strategy and unique technology that differentiates Xaar from its mainly Japanese competitors. We suspect that market share in key end markets is slowly being regained albeit it is still early days in the 5-year strategy roadmap. Covid disruption to production and supply chains, especially Chinese ceramics demand, means we remain cautious and leave our forecasts unchanged across all years. EPS division – asset adjustments While EPS revenue in 1H21 is in line with management expectations, the FY21 divisional outturn will include some as yet unquantified non-cash adjustments relating to slow-moving and obsolete inventory. We estimate these could be £1-2m. 3D sale getting closer Negotiations continue to progress on the sale of the remaining 55% stake in Xaar3D to Stratasys. Ample cash for more M&A Net cash at period end (30 June) was £17.1m, in line with our FY21E estimate. The acquisition of FFEI (announced 12 July) is net neutral on cash this year and we expect further M&A to accelerate the growth strategy and help strengthen capability. Significant self-help still to come, along with potential attractive new markets Xaar is getting closer to the profit inflection point and we see upside risk to our forecasts. The valuation continues to look attractive, on 26x CY23E earnings and 10x EV/EBITDA. We see scope for revenue upside in the medium-term from addressing incremental new applications. Some of these have interesting ESG angles, such as more efficient automotive paint spraying and energy saving opportunities from using high viscosity water-based inks.
FY20 ahead: FY20 revenue was £48.0m, ahead of our £47.7m, driven by increasing printhead volumes as customers re-engage. Ceramics & Glass revenue increased 26% H-o-H in 2H20. Printhead gross margin was 40bps higher than we expected at 27.1%, up 500bps y-o-y and achieving 31.0% in 2H20. This run-rate into FY21E, and lower costs, drives an upgrade to our forecasts. Our adjusted LBT was £4.3m, ahead of expectations (a £9.6m loss) when adjusted for Xaar 3D moving into discontinued ops (see below). This brings a potential positive adjusted PBT inflection in FY22E a step closer (we upgrade £2.1m to a £0.4m loss). Adjusted net cash was £18.1m, as expected. Quicker 3D sale: CV19 has impacted beta testing and machine manufacture, causing delays and a need for further cash investment. In light of this extra cash requirement, the Board is reviewing its options to accelerate the sale of the remaining shares in Xaar 3D. A sale is seen as highly probable by the Board and it has therefore been classified as a discontinued operation. We adjust our forecasts to reflect the potentially lower proceeds, but quicker payment. Enhanced pipeline: The Xaar 3D proceeds could further accelerate the enhanced product development strategy where management now see greater growth opportunities. We add an extra £1m to our printhead R&D in FY21E. Nitrox injection: The latest ImagineX platform product, the Xaar Nitrox printhead, has been launched today. This has a higher print frequency (48kHz) giving it a 40% faster print speed/productivity improvement for a similar price to the existing Xaar 1003, which it will replace. It is targeting Ceramics, Labels and Adv. Man applications. See figure 4 for our new product launch schedule. 43% FTR: We detail our forecast changes in Figure 1, upgrading our profit estimates and adjusting for lower Xaar 3D costs. We increase our TP by 20p to 210p reflecting our improved CY22E/23E EBITDA estimates. We reiterate Buy.
FY20 in line: Trading in 2H20 was in line with the Board’s expectations. FY20 revenue is expected to be c.£48m, 3% ahead of our £46.6m. We estimate that this higher revenue has also reduced the expected loss for the year and upgrade our adjusted LBT estimate by 9.6% to -£9.6m. Printhead momentum: Further progress has been made by re-engaging with previous customers, especially in ceramics. We understand several returning OEM customers have launched new printing machines, with Xaar printheads, in recent months. Management continue to develop their new product development pipeline with key new products now in beta machine testing. Product Print Systems: Progress has been made with the strategy to develop a modular and scalable approach to printing machine design and manufacture. This will, in time, improve profitability and aid higher volume sales. Customer activity and product development has been impacted by CV19. Xaar 3D: While there have been some CV19-related delays, further progress has been made in developing the larger-scale beta testing machines, with several sold to customers in 2H20. Management continue to work closely with Stratasys to maximise the commercial application of this technology. We continue to expect Stratasys to exercise its put option in FY22E. Net cash stronger than expected: Year-end net cash was £20.2m, ahead of our £17.2m, aided by positive cash generation in both the printhead and Product print Systems businesses, and an ongoing focus on operating costs. Forecasts: We increase FY20E revenue closer to the £48m guidance and reduce our expected FY20E losses (see figure 1). We increase our net cash in line with the year-end outturn. This net cash equates to 26p per share, underpinning 16% of the current share price. We leave our headline outer year P&L forecasts unchanged. Our TP remains 190p and we reiterate our Buy.
Xaar has issued an update highlighting that trading for the six months to 30 June has been in line with the Board’s expectations and that good progress is being made in implementing the new strategy. H1 revenue is noted to be £23.7m, a 7% decline relative to H1 FY2019, but sequentially in line with H2 FY2019. In the Printhead business, sales are no longer being made through distributors and OEM customers are now re-engaging with the group. New product development in printheads remains key to reversing market share losses over the last few years. Product Print Systems is marginally ahead in revenue terms in the first half, which is below plan, and Xaar 3D is noted as making good progress in testing despite lockdown restrictions. The balance sheet is strong with cash and cash equivalents of £23.9m. Financial guidance remains withdrawn, given the shorter term uncertainties, with the Board focused on a return to profitability in FY2022. The shares trade at c.0.6-0.7x EV/sales, excluding cash ring fenced in Xaar 3D of $7.25m at 19 November 2019 and the potential payment of $33m should Stratasys exercise its call option over the 55% of Xaar 3D that it currently doesn’t own.
FY2019 was a very tough year for the Group, characterised by the decision to cease investment in its Thin Film technology and issues affecting the performance of the core Printhead business. The adjusted loss before tax was £69.8m and included a loss of £9.8m (FY2018 - £4.5m profit) in respect of continuing operations. Period end net cash was £25.3m and this provides the new management team with the resources to implement their strategy and to withstand the uncertain impacts of COVID-19 that are behind today’s expected withdrawal of financial guidance. Whilst management reiterates that the Group has yet to see a significant impact on demand, the statement highlights that the situation continues to evolve rapidly, resulting in actions being taken to preserve cash and to maintain liquidity, including also the use of Government support measures as appropriate. The new strategy looks to address key deficiencies in the previous business model and management believes this sets the right course for an eventual return to profitability and growth in the medium term.
Following a review of internally available resources, we are temporarily withdrawing our estimates and suspending coverage. We previously had a 50p target price based on a sum-of-the-parts valuation and discount cash from the 3D business sale with a Hold recommendation. Key risks identified included the 3D business sale not agreed, 3D option not taken, cash burn from restructuring activities, legacy business continuing to decline, and increased competition.
The Group has announced interim results, which include the impact of the decision to cease its Thin Film operations, and also extensive Board changes. In view of the Stratasys transaction we remain restricted and can therefore provide factual comment only. Interim results show an IFRS loss before tax of £52.3m and an adjusted loss before tax of £15.0m. A separate announcement covers management succession that will see the Chairman, SID, CEO and CFO leave the Group.
Ceasing Thin Film activities The strategic review of the Thin Film business has concluded that without a partner to share the funding, Xaar is unable to fund the ongoing investment required to fully bring this technology to market. It has therefore reluctantly decided to cease further investment and all activities related to this programme. There is an associated £39.0m impairment taken in 1H19 to write down the carrying value of the capitalised R&D and all other assets involved in Thin Film. Unable to fund further investment We need to fully understand the level of investment that was expected to be required in the coming years for Thin Film as we had understood that the 5601 printhead was ready for integration into customer machines and launch into the market in 2020. Clean sweep of the Board CEO, Doug Edwards, is stepping down to explore opportunities back in the USA where his family is based, he leaves on 31 December 2019. CFO, Shomit Kenkare, has resigned and also leaves on 31 December 2019. New CEO designate, John Mills, who joined in August 2019 as head of the Printhead Business Unit, will take over on 1 Jan 2020. John worked for Domino Printing from 1994-2001 and most recently was CEO of Inca Digital for 5 years until October 2018. Chairman, Robin Williams, will step down after the FY19 results (March 2020) to provide continuity for the new CEO. Current NED, Andrew Herbert (ex Domino Printing CFO), will take over as Chairman which we see as a positive move. 1H19 net cash of £22m worth 27p If shareholders approve the 15% share sale of the 3D printing business, this is worth c.15p per share in the near-term with scope for another c.30p within the next three years for the remaining shares (giving an extra 45p per share in total). Add this to the current 27p of net cash, and assuming this doesn't go down further, it implies up to 70p per share within three years. The EPS product print business is profitable. You could then be getting a free ‘option’ if some value can be generated from the legacy Bulk/P3 printhead technology going forward on a restructured cost base.
Ahead of its interim results next week Xaar has announced a significant strategic development for Xaar 3D Limited, its 3D Printer business. Xaar has entered into an agreement with Stratasys that, if approved by shareholders, will see Xaar’s holding in Xaar 3D reduce from 85% to 55% and the issue of a call option that would on exercise see Stratasys own 100% of Xaar 3D. The statement comments that ‘[the group] is pleased that this transaction will create good value for Xaar shareholders and [that it] unlocks the ability for more significant value in due course.’ The proposed transaction and proposed further investment is a Class 1 transaction and also a related party transaction that is subject to shareholder approval which is expected before the end of the year.
Xaar has issued a trading statement together with an update on its strategic review of its Thin Film business and notification that it is to delay the interim results to 26th September (from 10th September). Whilst the statement confirms that first half revenue was £22.5m, trading for the remainder of the year is now expected to be weaker than previously anticipated. Second half revenues are now expected to be similar to the first half. The interims are being delayed to allow time to provide a more meaningful update on a strategic solution to the Thin Film business.
Xaar has issued its scheduled trading update for H1 FY2019E that confirms trading is in-line with management expectations. The statement highlights underlying revenue progression of c.8%, excluding the impact of one-time royalties in H1 FY2018 and a £4m revenue reversal in H1 that is expected to be recovered in H2 FY2019E. There are many moving parts, which additionally include the potential impact from the Thin Film strategic review and the next phase in Xaar’s 3D Printing partnership with Stratasys, and we intend to take a more detailed look at our estimates in the light of the interim results that are due on 10th September 2019.
2018 was a difficult year for Xaar. Revenues from ceramics fell more sharply than the group had expected, while growth in sales of its new Thin Film products was delayed. Management reduced costs, while continuing to drive strategic progress, diversify the business and explore printhead partnering options to share costs/help maximise opportunities. However this was overshadowed by downgrades to profit expectations through the year, and ultimately a move into loss. Given this backdrop, the difficulty for investors is gaining confidence that performance has now troughed and that Xaar’s efforts to build new revenue streams is beginning to pay off. The group has not yet provided proof of its recovery, but we note that ceramics revenues increased in H2 18, while Thin Film and 3D Printing have been validated by external customers and partners. It is difficult to value the company at this stage, but based on our near term forecasts and before any new partnership agreement, we suggest 135p per share.
Xaar has provided an update for 2018, confirming underlying trading and year end net cash in line with its previous announcement from December. It has also highlighted a probable increase in provisions of c.£7m on the basis of prudency, subject to final audit. This is for inventory and debtors, driven by the previously reported slow ramp up of new product volumes in China, primarily its 1201 Thin Film printhead, due to integration issues. The increase in working capital is expected to reverse, but over a longer period than normal. Management expects to take this provision above the line as it relates to sales of continuing products, increasing the reported loss before tax for the year. We have not published updated numbers post the December warning, but noted at the time that this could result in an underlying loss before tax for 2018 of c.£4-5m vs our previous £2m estimate shown below. Post provision, we would expect loss before tax to be closer to £11-12m for the year. The integration issues are now reported to have been resolved with sales volumes expected to increase in 2019. We will review our forecasts following the prelims on 21st March, when management is also expected to give an update on options to reduce costs in its printhead business through more extensive partnering.
Xaar has given an update on trading, which has missed management’s expectations for the final months of 2018. This has been driven primarily by continued declines in sales into its legacy ceramics end market, but also slower than expected adoption of the 1201 printhead. Revenues for 2018 are now expected to be c.£64m, c.£1.5m below our £65.5m forecast, however gross margin has also been impacted by a negative mix effect. We have not yet updated our forecasts, which we place under review, but would anticipate a profit shortfall of c.£2-3m. This could result in a loss before tax of c.£4-5m for 2018, vs our current estimate of a loss before tax of £2.0m. It is disappointing to need to trim our near term forecasts again, particularly given the good progress over recent months regarding longer term revenue streams. This includes securing three new OEM partners (Windmöller & Hölscher, Neos, KELENN Technology) which have adopted Xaar’s 5601 next generation Thin Film printhead for applications in new end markets, with commercial revenues potentially beginning in 2020. Management remains focused on more extensive partnering for its printhead business unit, while also addressing the cost base, and expects to provide an update at the prelims on 21st March.
Redde (REDD LN) Positive start to FY19e, forecasts unchanged | Xaar (XAR LN) Appointments of CFO and Company Secretary
Xaar plc Redde Northgate PLC
Xaar updated the market last week that trading has been below expectations since the end of June. This has been driven by slower than anticipated adoption of the wellreceived new 1201 printhead and a continued aggressive decline in revenues from Xaar’s legacy ceramic tile printing market. The H1 18 results saw a fall in adjusted operating profit from £7.8m to £3.1m, a reduction in net cash to £36.8m and a rebasing of the dividend to 1.0p. We have cut our estimates to reflect the current difficult trading environment, and now forecast adjusted operating losses for FY18 and FY19. However we would expect these forecasts to increase once the strategic review of the Printhead business is completed, whether due to partnering or to further cost reductions. The results are disappointing, but strategic progress to drive future growth has been encouraging. This includes the new partnership with Stratasys for 3D printing and the announcement by OEM, Windmöller & Hölscher, that it will use Xaar’s new 5601 printhead for the flexible packaging market.
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Xaar has given an update on trading during H1 18. While the group continues to make progress in its new products and markets, the decline in sales from its legacy ceramic tile printing market has been sharper than anticipated. Management has lowered its expectations for sales to this market and initiated a corresponding cost reduction programme to align capacity with demand. The group aims to make savings of c.£2m in H2 18 such that FY18 adjusted PBT remains in line with market expectations, although with a more pronounced H2 weighting. We have downgraded our top of the range FY18 adjusted PBT forecast to this level, which represents a 16% reduction, followed by cuts of 12% for FY19 and 7% for FY20. This downgrade is disappointing, but is driven by the legacy business only. We expect continued strong growth from non-ceramics sales (82% of forecast product sales in FY18, vs. c.33% in FY15) and a return to profit growth for the group in 2019
Xaar’s reported numbers for 2017 were ahead of our forecasts, reflecting £10m of upfront license revenue from the agreement signed with Seiko in December 2017. Excluding this, underlying sales, profits and net cash were in line with our estimates. The group continues to show good growth in its new products and markets (sales up 23%), while sales from its legacy ceramic tile printing market continue to decline (down 20%). The transformation of the group to a more broadly based and customer focused business has been challenging, with underlying progress also obscured by lumpy high margin licence fees. However this progress will become clearer as ceramics become less significant (26% of our forecast product sales in 2018) and the final Seiko royalty revenues are received (also 2018). We expect Xaar to return to profit growth in 2019 and for this to be reflected in the share price.
Xaar Flash : 3D Printing - The Third Leg
Xaar has reached an agreement to receive an upfront payment instead of future royalties from one of its licensees. Xaar will receive a total payment from Seiko of ¥2.98bn/c.£20m, paid in two tranches. These will both be paid by the end of H1 18, although exact payment dates have yet to be confirmed. We view this upfront payment as a better outcome for Xaar than the royalty stream, which we have always forecast to decline towards zero by the early 2020s (N+1Se £5m in 2018, £4m in 2019). We have not yet amended our forecasts, pending clarity over timing of payments. However clearly we would anticipate an increase in net cash by 2018 and an associated reduction in underlying sales and profits, as the future royalty stream will represent only one remaining licensee (Toshiba TEC).
At our 3D Printing and Advanced Manufacturing lunch on Monday three companies updated us on the developments and significant opportunities for their business in this exciting new area. We were pleased to welcome speakers from Xaar, Victrex and unlisted group Metalysis. Each company gave a 15-20 minute overview of their existing activities in 3D printing and how they are continuing to develop their offer to capitalise on the strong growth and value creation opportunities ahead. Brief summaries are listed below, with more details inside, along with the slides presented by each company. All three of the groups have strong prospects and we are happy to arrange further contact.
Xaar plc Victrex plc
Curtis Banks Group (CBP LN) Upside from strategic initiatives not yet recognised | ECO Animal Health Group (EAH LN) Marketing authorisation for Aivlosin® in Canada | IDOX (IDOX LN) Year end update and Board change | Microsaic Systems (MSYS LN) New phase of research agreement with global partner in biopharma | Safestyle UK (SFE LN) Tougher trading & further margin pressure drives another 10% d/grade | Zotefoams (ZTF LN) Strategic partnership with Nike
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Bagir Group (BAGR LN) Slow Q4 but positives on costs and partnership talks | boohoo.com (BOO LN) Shares oversold – upgrade to buy | Cineworld Group (CINE LN) Shares oversold - addressing recent concerns | Xaar (XAR LN) Lowered expectations due to Ceramics & Graphics
XAR BAGR BOO DQ6
The company has today warned that revenue in the second half of the year will be broadly in line with the first half. The shortfall against previous expectations of growth results largely from fewer than planned new printer installs of Xaar's 2001 Printhead, and slower than anticipated ramp up of the Xaar 1201 Printhead due to supply constraints. We are placing the stock under review as we assess our forecasts and recommendation.
Xaar has evolved from a one-hit wonder in 2013 to a company capable of consistently employing capital at double-digit growth and generating progressively higher returns on capital employed. The digital revolution is still at an early stage accounting for just 3% of total print and printed packaging market. As the largest independent printhead supplier, Xaar continues to lead the major disruptors in piezoelectric drop-on-demand printing. Specifically higher productivity in ceramics and 3D printing, longer life in printed electronics, environmentally friendly water-based jetting and flexibility in direct-to-shape. Based on capital employed of £278m in 2018 and pre-tax cash ROCE of 14%, we forecast a 12-month target market cap of £435m, equivalent to 556p per share. BUY.
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Xaar’s H1 update has confirmed trading in line with expectations. Management anticipates flat revenues of c.£44m for H1 17 and has reiterated its previous guidance of a higher than normal H2 weighting for the year, as sales grow from newly launched print heads such as the 1003 and 1201. The group has also announced a Joint Development Agreement with Xerox, building on the Partnership Agreement signed in January. This commits the two groups to jointly funding and developing the next generation technology platform for industrial bulk piezo print heads (ie the successor to Xaar’s P3), leveraging their combined IP and resources to deliver products more effectively. We do not anticipate changing our forecasts at this stage, as Xaar intends to reinvest R&D savings from this shared development into sales & marketing to drive its strategic development.
We are terminating coverage of Xaar with immediate effect. All forecasts have now been removed.
Xaar’s share price has fallen by 37% since mid September. This appears to reflect concerns about forecasts given a softer backdrop in China, its largest geographic end market for its largest application, ceramic tile printing. On our forecasts, the group is now trading on a c.35% discount to the sector EV/EBITDA multiple for 2017, which is at odds with its strong growth prospects. Prelims scheduled for 22nd March will provide a welcome update on progress. However in the meantime it should be noted that (1) 2016 earnings have already been confirmed; (2) trading is typically quiet in Q1 due to Chinese New Year and, while demand from ceramics should be clearer by the prelims, growth drivers are broadening out for the group due to its revised strategy; (3) targeted sales of £220m by 2020 imply very strong growth as the strategy is delivered, growth which is not reflected in N+1S or consensus forecasts and which suggests potential for material upgrades; (4) the strategy should also bring much greater earnings resilience; and (5) the balance sheet remains extremely robust, with a strong year end net cash position.
Xaar’s year end trading update has confirmed earnings in line with expectations, but from a different revenue mix than we had anticipated. Sales into the ceramic tile printing market are lower than our forecasts, reflecting slower than expected redesign and roll-out of customer printers using the new 2001 and 2001+ print heads, along with continued competitive pressures. However sales are above expectations into all sectors of the packaging and product printing market, as are licensing revenues. Meanwhile initial demand is high for the newly launched Thin Film/P4 print heads, which are expected to provide significant revenues in 2017, ahead of our estimates. We have made no changes to our forecasts at this stage, but expect to adjust our segmental mix and review assumptions post the prelims on 22nd March 2017.
Xaar has confirmed H1 16 trading in line with expectations, with sales of c.£44m. This is in line with the run-rate achieved in H2 15, adjusted for normal seasonality. We have made no changes to our forecasts, which already assume 2016 underlying sales at this run-rate, plus an initial contribution from Engineered Printing Solutions which was acquired on 1st July. The balance sheet remains strong, with net cash of c.£69m at the period end. The group’s strategy remains on track, with first commercial sales from Thin Film anticipated at the end of 2016.
Xaar has made two material announcements as part of its appearance at the main printing equipment exhibition, drupa, providing further confirmation of its strategic progress. The first is the launch of its Thin Film/P4 family of print heads, on time and on budget after multiple years of development and investment. This platform offers substantial improvements over the existing technology and is expected to open up new markets and underpin future growth. The second is a strategic partnership with Ricoh, extending Xaar’s product offering through collaborative development at modest cost. We have made no changes to our forecasts at this stage, which put the group on a 2016 EV/EBITDA multiple of 10.3x, c.15% below Electronics and Electrical Equipment peers and the wider capital goods sector.
Xaar reported adjusted 2015 PBT 9% ahead of our expectations driven by an increase in gross margin. We have increased our forecasts for adjusted PBT and EPS by 6% for 2016 reflecting this improved profitability. For 2017 we have made the same underlying increase, however our forecast shows a material downgrade as we have also assumed that the first Thin Film/P4 products are successfully launched, capitalisation of R&D ceases as this programme reaches fruition, and that the group begins to amortise the product development on its Balance Sheet. This represents a £10.5m P&L swing which has reduced our adjusted 2017 PBT and EPS forecasts by half, although our FCF per share forecasts are largely unchanged. The group made significant progress in 2015 to stabilise sales to its primary market and to develop the business and its products to open up new markets, with a strong pipeline of launches for 2016 and beyond. Management confidence in the growth opportunities ahead is evidenced by its new target of £220m revenues by 2020, which could suggest adjusted EPS of c.49p in that year based on a historic operating margin of c.20%. This would give a c.15% CAGR, ahead of anticipated sector growth rates.
Xaar’s year end update confirmed sales in the middle of its £92-95m guidance, as sales growth to packaging markets offset the anticipated softening in demand from ceramic tile printing in China. However profitability was higher than expected due to improved plant efficiency in both Sweden and Huntingdon. We have increased our adjusted PBT forecast for 2015 by 10%, but left subsequent years unchanged reflecting the still uncertain backdrop in China and potential for margin reversal in the Swedish facility as it approaches closure. Net cash increased to c.£70m (c.91p per share), a little ahead of our expectations. The prelims are scheduled for 16th March.
Xaar has announced the appointment of Professor Neil Hopkinson to a new role as Director of 3D Printing. The Professor is an industry heavy hitter, the original inventor of high speed sintering (HSS) with extensive experience of additive manufacturing. His role at Xaar will be to continue development of this technology, which uses Xaar print heads, and help accelerate its adoption for volume manufacturing. This will build on his work for the UK Government funded Factum Project, with university and industry partners (Unilever, BAE Systems and Cobham Technical Services). This is an exciting but still immature area of manufacturing, and we would expect a positive response to Xaar’s new appointment.
Xaar has announced two changes to the Board. Chris Morgan will join as a Non-Executive Director in January, bringing extensive international and management experience from 25 years at technology group, HP Inc, with direct experience in Xaar’s markets. The group has also announced the resignation of Chief Customer Officer, Richard Barham, whose role will not be replaced with another Board appointment.
Xaar’s Q3 update reiterated existing guidance, reflecting H2 sales to date broadly in line with H1. Sales to the ceramic tile printing market have been stable but seen some softening in China in October; packaging sales continue to grow (including direct-to- shape); and graphic arts sales have declined slightly less than expected. We have not changed our 2015 forecasts, which assume sales at the bottom of the £92-95m guidance given lack of visibility regarding Chinese demand. For 2016 we have trimmed sales to ceramics but assumed opex is reduced accordingly, hence profit forecasts are unchanged. Medium term growth prospects are supported by new product launches and development of the next generation Thin Film technology, which remains on track. Net cash has increased to c.£67m.
Xaar reported a YoY decline for H1 15, but a HoH improvement as sales stabilised and profitability increased. Packaging offers the best potential for near term growth, while development of its next generation Thin Film technology remains on track and should open up new markets and applications longer term. We have increased our 2015 PBT forecast by 4% and note the c.10% EV/EBITDA discount to sector multiples.
Xaar has given a reassuring H1 2015 trading update. Sales to the ceramic tile printing market stabilised in H1, following the decline in demand in the latter half of 2014, and sales to other end markets performed in line with expectations. While visibility remains limited, performance YTD has led to an increase in full year guidance from c.£90m to c.£92-95m of sales. The group has also reported a net cash balance which is stronger than we had expected at £58.6m, reflecting a reduction in stock and phasing of capex. We have increased our 2015 sales forecast to reflect the updated guidance, driving a 5% upgrade to adjusted operating profit and PBT, and increased our forecast for year end net cash from £50.0m to £60.3m. We have not changed our 2016 sales and profit forecasts at this stage. Development of new applications, such as direct-to-shape, and the next generation Thin Film/P4 platform remains on track.
Xaar (XAR.L) – Trading update
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