Shares in injket manufacturer Xaar (LON:XAR) fell sharply today. The latest Xaar profit warning lopped off another 35% off the price and comes just two months after the previous warning.
It’s been a torrid time for investors here. In January, the share price briefly topped out at over 400p. The 52-week share price is even higher, at over 500p. Today, the company is way below a third of that. If one wishes to go back further, the rate of decline is even worse, as in 2014 these shares were trading at over £11. It has been an incredible roller-coaster ride here, as the shares dropped out to just over £2 in less than a year, before recovering.
It seems easy in retrospect, but the year has seen at least one Xaar profit warning, particularly with regard to the adoption of new products. This was first announced briefly in the March annual results publication and reinforced with greater severity in June and now August.
A bit on what the company does. It manufactures inkjet printing technology for commercial use. It goes without saying that there are a wide-ranging amount of uses for this, from advertising billboards, to packaging, to the actual products themselves. A wide range of patents has seen the company solidify its position as a market leader. Perhaps unsurprisingly, the bulk of their business is in Asia; 50% of revenues generated came from the region alone.
It does seem from the results that the success days are long in the past. Almost all the vital metrics have been on the decline for the last few years, with no sign of them getting better. The trading report from today is short and sweet, and gets to the point. It starts off:
Revenue for the half year to 30 June 2018 is expected to be circa £35m, including £9.8m of one off royalties.
The comparable figure is not mentioned here, and for good reason too: a year ago this figure was £44m. Business is slightly second-half weighted but heavily so: it may be that we are on for a big fall in the full year figures from the rest of the statement:
Underlying trading since the end of June has been, and is expected to continue to be, below the levels previously anticipated by the Board in its announcement of 27th June 2018. Although the reception of new products has been positive, adoption of the 1201 printhead, in particular, has to date been significantly slower than expected, and the rate of decline in ceramics continues to be aggressive.
This seems to represent a bit of a double blow: as the new products were predicted to have a stronger weighting in the second half, and the decline in ceramics is quite significant as that is the company’s largest sector. The word ‘aggressive’ looks rather worrying in this context.
All of this has weighed heavily on the share price, which tumbled 35% today; clearly the markets are expecting this year to be a very poor one.
So, can Xaar be considered a good investment? I am fairly sure that there are many burned investors here that are seriously cheesed off with the company. As recently as July this was being tipped up in the newspapers. Anyone buying at those prices would have lost almost half their cash on paper. It is not a stretch to say that these are perhaps some of the worst times for the company. A Xaar profit warning is indeed like a bus, coming in multiples.
That said, the balance sheet is still relatively strong: although the cash balance has been declining, it still stands at a healthy £44m; the company is still profitable (although declining). This isn’t a company that is going to disappear overnight. The ownership is also heavily bought into by institutions:
Against that, the cash has only shown a modest decrease from the past year, but looking at the cashflow statement this was on the backdrop of a big decrease in investments in to plant, property and equipment and capitalised R+D costs. If Xaar are to trade out of this with better products, it seems less likely if they are not going to invest as much into them.
Profitability in the past year declined by some £5.5m, which almost all can be attributed to a large increase in general and administrative costs (there is no breakdown of these costs).
One of the biggest concerns I have is the makeup of the company revenues appears to be changing very quickly. Xaar seek to differentiate themselves as the ‘worlds only truly independent inkjet technology company’ but in reality this seems to count for very little, as the firm has come under quite strong competitive pressures over the past couple of years. The breakdown in revenues is quite interesting as can be seen here:
That is a huge decline in the EMEA region and also a huge uplift in the Asia region, specifically China, which now accounts for almost a third of revenues. I can’t say that this fills me with any confidence given the rather weak IP rights in China – one might suspect that after a while they will replicate the technology themselves at a better price point, as we have seen in quite a few other fields.
The case is also similar for the Ceramics part of the business: 2016 showed revenues of £42.6m, falling to £33.7m in 2017. With the rate of decline ‘continuing’ to be aggressive, you can only assume another similar fall for the year. Considering the company is still publishing its target of £220m in sales by 2020, even getting to half of that looks like a big challenge.
There may be some good supports for the share price: the first that the sector is rapidly changing; the digital era offers a chance to refresh all products. That’s even before mentioning 3D printing, which potentially offers explosive growth rates if the right product can be developed.
Another thing that comes to mind is whether the firm could be a takeover target. Xaar collaborate with many larger firms and may end up being swallowed outright. Their valuation at present I feel is still relatively high bearing in mind declining earnings but they may offer synergies for others, who would have already invest into similar products.
Those factors prevent me from scoring it too low, but I’d be inclined to rate it as 2/5, I cannot see Xaar turning it around to achieve their goals.