Description

Xaar (XAR.LN) is a leading printhead manufacturer growing through taking market share in its core markets and expanding into new, dynamic markets with new products.  Printheads are technologically complex, and Xaar uses a variety of advanced techniques in its various products.  Currently trading at 2x sales with 8.6% operating margins, I think the business can grow significantly through 2025 and establish 20% operating margins by that time.  At that point the multiple would be 1.3x sales and 7x earnings which is not sustainable, catalyzing significant stock price appreciation by then. 

Xaar’s business and stock had a great run from 2009 to 2013 when revenue grew from £41 million to £137 million and operating profit grew from £4 million to £40 million.  The stock responded by going from 100p to 1,200p.  This fundamental business improvement was caused by the mass digitalization of ceramic tile printing which Xaar was a prime beneficiary of.  Xaar’s printheads are digital where previously ceramic tiles were printed in an analog process.  Analog is good for long runs of the same print whereas digital allows you to change print outputs much more easily.  The business began to decline in 2014 and reached its nadir in 2020 at £48 million in revenue and a small operating loss.  This decline was caused by the maturation of the digital changeover in ceramic tiles and the loss of market share through a strategic error by prior management.

Prior management began to sell full printers in competition with its customers.  Many customers responded by designing out Xaar's printheads and using competitors’ products.  John Mills, CEO, and Ian Tichias, CFO, came in 3 years ago to turn the business around.  The first thing they did was to stop selling full printers and refocused on the printhead business.  They let their former customers know that they were no longer competitors and slowly the customers have redesigned in Xaar printheads to their printers.  This is a long process, often taking 2 years until the redesigned printers hit the market.  Some early success can be seen already with revenue at about £71 million this year with positive operating income of £6.1 million versus an operating loss of £4.3 million in 2020. 

Product innovation is a key focus of the new management team.  The goal was to build a new product platform and then introduce variants off that base.  The ImagineX platform was introduced in early 2021 and the first product based on that platform was the Nitrox, which was introduced in April 2021.  This product leads the market in print speed and in the ability to use highly viscous inks.  Nitrox is targeted at the 3D printing and advanced manufacturing market.  This is a rapidly growing market that currently stands at about £100 million in size and Xaar has <5% market share.  Xaar had a joint venture with Stratasys to produce 3D printers powered by Xaar’s powder-based SAF technology.  In April 2021 Stratasys introduced the H350 printer based on that technology.  In October 2021 Stratasys bought out Xaar’s share for about £20 million so now Xaar just provides printheads to that product and the wider 3D printing industry.

The next ImagineX variant was the Irix, a product targeted at the Coding and Marking (C&M) and Direct to Shape (DTS) market.  This is a mature £100 million market and Xaar has about 15% market share here.  The Irix has long throw distance meaning it can operate well away from the print surface which is valuable in this market.  The company thinks it can take market share with this new product.

This past week Xaar introduced a new product it has been working on for years, called the Aquinox.  This is an aqueous printhead that uses water-based paints, a first for the company. Prior products worked with oil-based paints.  The Aquinox is targeted at the packaging and textiles market, which is also about £100 million in size but growing quickly and Xaar has virtually no share here.  Aqueous printheads are notoriously difficult to maintain and often have a short life.  Xaar believes that with its new aQ Power technology, its product will be much more robust and have a longer life than competing products.  This will be a big growth driver for the company for the next 2-4 years.  Finally, the company will be introducing a product in H1 2024 that will be targeted at the £500 WFG and labels market.

Xaar has also done a couple of acquisitions to built out its product capabilities.  It purchased FFEI in July 2021 to add printbars to its product set.  This was a smart acquisition as Xaar paid £3.7 million with a £5.4 million earnout for a company that did £9.9 million in sales and had a 9% operating margin in 2020. It also acquired a small company called Magnajet to help its vertical focus.   

Xaar is a very underfollowed company with few people digging into its fundamentals.  After its big run in 2009-2013 it was left for dead by most investors.  As such it trades at a significant discount to its intrinsic value.  I believe that improving trends in the business driven by traction for its new products and regaining market share in the ceramics market will serve as catalysts for investors to once again get excited by this business.  I am modeling £106 million in revenue by 2025 and £0.29 in earnings.  Putting a 20x multiple on that and adding back the £0.77 per share in cash the company will have by then gets you to a 657p stock price or about 225% higher than current levels.  I do not think it was take until 2025 to play out as investors will begin to come back once growth starts to kick in over the next couple oof years.    

Catalyst

New product traction and market share gains will lead to revenue growth and expanding margins.