Xaar PLC

United Kingdom-based Xaar PLC (XAR) is the world’s prominent independent manufacturer of piezoelectric drop-on-demand industrial inkjet printheads. The Group operates in three principal geographical areas: EMEA, Asia and the Americas, while operations are differentiated in four operating segments: Product sales, commissions and fees, Royalties, Printhead and Product Print Systems.

Financial Highlights (for the six months ended 30 June 2019, £’000)

(Source: Interim Reports, Company Website)

In H1 FY19, the revenue stood at £22.5 million,a decrease of £12.8 million as compared with the corresponding period of the last year. Revenue accelerated by 5 per cent or £1.3 million when adjusted for the Thin Film Xaar 1201 revenue reversal in 2019 of £4.3 million, and the one-time royalty payment from SII (Seiko Instruments Inc.) of £9.7 million in 2018.

Gross loss in H1 FY19 stood at £2.6 million.The adjusted operating loss before tax stood at £15.0 million, a decrease from the profit before tax of £3.2 million in H1 FY18. While on an IFRS basis, loss before tax increased to £52.3 million as compared to the same period in 2018.

The adjusted diluted loss per share stood at 16.2 penceversus the diluted earnings per share of 4.6 pence in H1 FY18. On 30th June 2019, the net cash stood at £21.6 million.

Share Price Performance

Daily Chart as at November-05-19, before the market closed (Source: Thomson Reuters)

On 5^th November 2019, Xaar PLC shares were trading at GBX 46.70 at the time of writing before the market close (at 12:30 PM GMT), down by 0.21% against the previous day closing price. Stock's 52 weeks High and Low are GBX 169.4/GBX 39. The company's stock beta was 0.06, reflecting the lower volatility as compared to the benchmark index.

Conclusion
Some risks are competition, failure to identify market requirements, commercialising and maintaining products with cutting edge technology, Brexit, loss of manufacturing facility, inventory obsolescence, ability to access sufficient capital, customer credit exposure, and volatility in exchange rates.

The company's FY19 outlook remains challenging from a profitability perspective. Product Printing should see growth in China and from other products. However, the sale of Industrials increased by 12 per cent due to a combination of growth in Décor (45%), Advanced Manufacturing (5%), and Ceramics (9%). The company has to face integration issues which slowed down its Thin Film product. Brexit also poses significant risks for the company, most notably regarding EU workers and migration.

In the previous trading statement, the company anticipate sales in H2 FY19 to be same as in H1 FY19.In the Printhead business, the underlying trading has been stabilised. The company is seeing decent progress in the Product Print Systems division with a robust sales pipeline. The company also believe that the next stage of the partnership with Stratasys provides substantial value for the investors.

The decision to halt all additional investment in Thin Film activities results in the substantial impairment of related assets and a required generalization of the Printhead business unit structure. The removal of 7.4 million pounds of one-time Xaar 1201 related items and the anticipated annual cost savings of approximately £8.0 million, will result in a significant improvement in profitability for the upcoming year. Also, the 3D investment will also improve the cash position of the group. From a technical standpoint, the stock is trading above the 200-day simple moving average price, which is a bullish technical indicator.

Based on the healthy prospects, we have given a "SPECULATIVE BUY" recommendation at the current price of GBX 46.70 (as on 5th November 2019, before the market close).

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