Description

Xaar Plc (XAR.LN) is a manufacturer of printheads for use in industrial printing.  While anything remotely related to physical printing is usually seen as a declining or dying market, Xaar actually specializes in areas that are rapidly growing.  The inkjet printers that consumers are familiar with in home and office are all digital.  Digital printers do not require a physical master image to copy from, and therefore enable variable data printing.  Older analogue printers do require a master, and hence are only useful for situations in which the same exact image will be replicated many times.  Whereas digital printers dominate the commercial market, nearly all industrial printing still relies on analogue technologies, with digital penetration of only 3% among all industrial printing applications.

Xaar produces printheads which are the devices that convert electronic image data into a physical image printed on a substrate (ie. paper, packaging, bottle, fabric, etc.)  These printheads are sold to industrial printer OEMs who are seeking to displace traditional analogue technologies in situations where printers need more flexibility to make changes or have shorter design runs.  Importantly, Xaar is the only “independent” printhead supplier that does not also produce a full OEM printer solution, which serves as a competitive advantage within the market.  The company had early success with a product for flexible printing on ceramic tiles, however, after a period of rapid growth this business faltered in 2014 as a result of a weak construction market in China coupled with the fact that the very small ceramic printing market had almost entirely converted to digital.

While Xaar continues to sell into the ceramic tile market, we view the company as an exciting new product story, with the business having diversified its product lines from 1 to 8 following several years of heavy R&D investment.  The first area in which Xaar’s new products are making headway is printed textiles.  100 billion square meters of fabrics are printed annually, of which one-third are printed textiles.  Of these printed textiles, only a tiny 3% are currently digitally printed.  However, the continued shortening of fashion cycles driven by “fast fashion” retailers like H&M and Zara is driving adoption of this more flexible printing technique, and digital printing penetration within the textile market is expected to more than double by 2020.  In an effort to get out ahead of this trend, Xaar has invested heavily in textile printhead development, and released three products – the 1201, 5501, and 5601 printhead lines –targeted for this market.  Xaar should be a significant beneficiary of the significant annual growth forecasted for digital textile printing over the next several years.

Outside of textiles, Xaar has a large opportunity in product packaging.  In particular, direct-to-shape (DTS) printing is emerging as an attractive labeling option for large consumer packaged goods (CPG) companies.  Whereas historically, product labels for items such as laundry detergent have been printed on separate labels and then affixed to plastic containers, Xaar’s printheads allow for image and text to be printed directly onto the container.  The cost economics of this application are incredibly compelling, with DTS printing to 1,000 containers running about $0.23 versus $5 for a traditional separate label process.  DTS also allows for greater customization and seasonal packaging, which in an increasingly competitive CPG environment may be an attractive benefit for producers.

The wide format graphics market, with applications such as indoor and outdoor billboards and signage, is another area of significant potential growth for Xaar.  The newly released 1201 printhead is Xaar’s product targeting the wide format graphics market, and the company shipped an initial 4,000 units in June at an ASP of £500 for a total of £2 million in sales.  In the back half of the year, the company expects to book an additional £6 million in sales, bringing revenue from the 1201 product line to £8 million for 2017 (vs. total company revenue of just under £100 million for fiscal 2016).  While this is already a strong start for the new line, the most exciting aspect of the 1201 series is an agreement that Xaar has recently signed with the largest wide format graphics manufacturer in China for 90,000 printheads over the next two years.  This agreement alone represents an incremental £45 million revenue opportunity over 2018 and 2019.

While each of the new markets that Xaar is entering has entrenched competitors, the company is taking the novel approach of focusing its sales efforts on the printer OEMs it has sold to in the ceramic market who are now targeting these new verticals.  This approach should allow Xaar to quickly break into these new areas based on existing customer relationships.  As the company’s new printheads prove successful in these applications, we expect that Xaar will also be able to displace and take market share from the incumbent printhead suppliers.

Digital textile printing, direct-to-shape packaging, and wide format graphics production are just a few of the irons in the fire for Xaar.  Many other initiatives such as IP licensing into the 3D printing space, and numerous new partnerships with printing industry behemoths can likely add additional legs of growth.  Under the leadership of new CEO Doug Edwards who previously ran Kodak’s Digital Printing business, the company is moving forward on an aggressive 2020 plan which aims to grow revenue from just over £100 million this year to £220 million by 2020 (with at least some growth attributable to acquisitions). 

At current revenue levels, Xaar trades at 1.8x revenue, a low multiple for a business with its growth potential.  We feel it should trade closer to 3.0x sales, which would value the company at £5 per share representing 60% upside from current levels.

Catalyst

Traction with its new products should drive Xaar's price higher over time.