Xaar Epic XAR FTSEc Small Cap Index, Mkt Cap £135m Up and coming H1 preview.

Below is just some thoughts, it isn't investment advice or incitement to buy in any way, just my views - please do your own thorough research. I’m not an analyst, I’m just a private investor looking after my own money. Nothing I do or say is meant as advice or should be taken as such. Here I publish my ideas and research that I have done and discuss the way I invest.  Anything written here needs to be verified for its accuracy. Assume any stock I write about I likely own, so my views are biased. Inevitably I will get things wrong, ,As the Rag N Boneman said, I am only human after all, so do your own research.  Everyone is responsible for their own decision making and what they buy and sell. Subscribing and reading this article means you accept the above and you take full responsibility for your own actions and decisions. Small Cap stocks can be illiquid and vary hard to sell at times when demand is weak so caution is required.

Firstly I should say I rarely invest in tech companies. I like to be able to understand any business I hold as an investment longer term.  Aside from understanding the company I need to understand the competition too. I’m also really not that tech savvy.  However, in a former life I did have my own graphic design business and I used to use wide format printers and standard ink jet printers and proofing machines and I really had an interest in these things and the way they worked and how they achieved such fantastic detail.  Over time, what started as printing on paper has developed into printing on many different substrates directly.  I have followed Xaar since prior the tech boom.  Here’s a video from back in 1993 if you want to see their early success

  So having been interested in the tech pretty much from the day they became commercially viable and having used wide format printers up until a few years ago for printing my photos and graphic work as a hobby, and as a graphic designer, into large images, I have stayed interested. 

Most inkjet printers have a similar construction.  There’s a running bed on which paper or material or ‘substrate’, or the basic item to be printed is fed.  There’s a print head which sprays the ink a short distance onto the  substrate  wile shuttling backwards and forwards and there is an ink delivery system between the two.  Xaar focus mainly on the printheads.  The first commercial printers printed 360 dots per inch, that is, if you take a square inch of paper you get 360 dots vertical and 360 horizontal so in a square inch you have 360 x 360 dots or 129,600 per sq inch.  Today, higher resolutions and higher quality are the norm, with 720 dpi and 1440 dpi being regarded as standard high quality printing. Lower number dots are larger and so the print speed is faster, 1440 resolutions are prioritising quality. The average person wouldn’t notice the difference between 720 dpi and 1440 dpi, we are talking very fine margins here, 1440 is the geek end, where perfectionists like graphic designers can’t live with a line a few microns out of straight even if it isn’t visible to the naked eye.  1440 dpi can produce greater colour gamut though, so images like photos look best in 1440 dpi.

Xaar started as one of the first inkjet printing co’s and listed on the LSE. At that time the were two other UK inkjet printer companies listed Lynx Printing and Domino Printing Science.  These have since been gobbled up by the printing giants like Brother and HP which leaves Xaar as the last, independent inkjet printhead manufacturer in the world.  Xaar have unique and fantastic technology.  If we go back in time, Xaar have led the way in printheads for well over a decade and more.  Xaar’s weakness over time has been commercialising their tech in the best way to get a spread of markets and not rely on just one or two main sectors. Inkjet printers can print onto many different substrates or products.  Commonly they may print the sell by date on a food product packaging but they may also print labels , especially those that may need custom enhancing like consecutive numbering, or with say a colour or a size printed on them. Today inkjet printing goes a lot further and while most people will be aware that they print posters and vehicle graphics they also print onto ceramics like tiles, direct onto bottles and even complicated shapes.  Inkjet printer heads are also used for 3D printers.  10 years ago, under the previous management, Xaar decided to focus on one main areas of tech – ceramics.  So successful were they at being able to print onto ceramic tiles that they captured virtually 100%  of the ceramic tile market.  The shares rocketed.  The operational gearing here is pretty large and if sales soar, earnings soar even faster. In March 2013, sales rose 26% and earnings nearly doubled from 10.7p to 20.1p A year later sales had risen 55% and earnings doubled again to 43p+. The shares rose from £2 to a £12 record high.

Unfortunately for Xaar, the market woke up and started to compete with new products but this was a great illustration of just how leading  Xaar products are. Xaar needed a new market and focussed on two areas, 3D printing and a new tech known as Thin Film, a very new architecture for printing.  Having banked a ton of cash in the ceramic boom the then management spent 10’s of millions of pounds on these two areas.  3D printing paid off in a way.  Xaar’s printhead development  proved perfect for 3D printing but the development cost was large.  The Thin Film development costs were even larger and the company was galloping through cash.  Over the next few years the existing board had to admit the cost of chasing these two products was costly and they fell on their swords. The cost of the development of these products and the crazy idea of competing with your own customers parts sales by supplying to non OEM supplier and undercutting OEMs were just the last straw in what had been a 5 year decline, a new board was brought in.

How often do you get the chance to buy into the recovery of a world class tech company? One where you can see they have had world class products that captured 100% of a given sector, it’s that good. One where the CEO has said the recovery phase is over, they are now on the growth phase?  The new board are formerly guys from very successful Domino Printing Science, also out of Cambridge Business Park like Xaar.

John Mills is the new CEO.  He started out at Domino Printing and had been heading up IncaDigital for 5 years at Cambridge and left with glowing references to join Xaar.  “John has been instrumental in turning Inca Digital into a world-class and internationally respected inkjet business over the past five years,” said Inca on his departure. John Mills has a phD in physics.  As a previous customer of Xaar it was easy for him to see what was wrong.  He shut down the Thin Film project and sold off the 3D printing business.  This drew a line under the massive R&D spending and cash drain and left Xaar with around £25m cash and no debt.

Upon joining Xaar, Mills got a huge surprise. The technical departments had cupboards full of uncommercialised world beating tech all of which had been ignored by the previous board in pursuit of chasing Thin Film and 3D.  Mills has literally taken this tech, put it all together and along with rebranding Xaar they created the new Imaginex platform.

Mills went out to all the manufacturers, asked what they wanted and told them the old Xaar was over. No longer would they sell to third parties and the new Xaar now had a ‘can do’ attitude which was absent under the old management.

Xaar have put a roadmap together of printheads that will cover the 5 major marketplaces together with new printhead capabilities.

Firstly they have introduced the ability to print aqueous inks which are water based. Up until now Xaar have printed solvent based inks.  These inks use solvent which are increasingly being reduced by industry in favour of less harmful water based ‘aqueous’ inks.  The print heads are obviously electric so using water isn’t easy.  They have also introduced the ability to print high viscosity inks.  This is unique to Xaar due to their ‘through flow technology.  Cutting the technicals out and in layman terms, other print head manufacturers spray the ink strait down the tubes to the head which means ink tends to dry up on the jets and block up.  Xaar’s ‘through flow tech’ (TFT) runs the ink on a sort of circuit across the back of the jets then blasts it through, this prevents blocking. The architecture is unique to Xaar and patented, other manufacturers would need to completely redesign their heads and use a Xaar patent to achieve this.

With Xaar’s new printheads companies can print with higher viscosity inks and with higher temperatures to reduce drying time.  Printing material like cotton or silk require a base coat or undercoat first in order for the ink to dry on or else the ink soaks in and ‘spreads’. With Xaar’s heads the undercoat layer can be left out so they print direct onto the material.  This saves time and cost.

The biggest guide to how these new printheads and technologies are likely to sell can be gauged by the amount of development tool kits being purchased by OEM (Original Equipment Manufactures) .  Development tool kit sales have rocketed and this should indicate big print head sales going forward.

One big issue since Mills got to become CEO has been Covid and China. The lockdown slowed their ability to enable customers that require the full development of an inkjet system.  The ink delivery systems that feed the printheads were often difficult to get their hands on.  Xaar made two important strategic acquisitions to ease up the bottleneck. They acquired Megnajet.  Megnajet specialise in the design and manufacture of industrial fluid management systems for digital inkjet and are the most integrated and compact ink systems in the market today, offering various options to customers to give them the fastest and most reliable routes to market.

They also acquired FFEI, a design company focuses on high performance digital imaging solutions – from digital inkjet label presses to digital pathology scanners.  These two acquisitions allowed Xaar to provide customers with the full ink, design and delivery solution, saving them having to hunt around to get a team together that could put together a whole inkjet printing system. Another Covid issue was limited supply of parts from China. The delays were proving difficult but Mills decided to bite the bullet and repatriate a lot of their Chinese production back to the UK and use up a lot of spare capacity they had in the UK with two unused clean rooms.  This was all done in two months after building up a large backlog of inventory to cover the shutdown of manufacturing.  Everything was completed to time and budget and the business is now fully up and running.

So now we enter the start of an exciting phase.  We should soon hear how well water based inkjet heads are selling.  There is a big market for water based ink printing. Companies are under pressure to up their ESG credential and reduce energy costs, Aquinox is their brand name for water based ink system heads.

Xaar have 5 major markets globally to go after.

Xaar Irix printheads have also been developed for printing with the print heads that can print from further distances.  These supply a small market.

Xaar Nitrox print heads print 3D and Advanced Material and has seen strong demand.

Xaar aQ (Aquinox) is the water based heads mentioned above. These are seeing strong demand for their faster printing and lower energy use.  These are expected to be the fastest growing product and transformational for Xaar and the print market.

Wide format graphic heads will be next on the list and due to go to market in H1 2024.  This is a massive market of over £500m which Xaar hasn’t addressed before and stands to make huge sales.

Having acquitted FFEI and Megnajet businesses in the past two years, Xaar can now design the print systems and provide the print delivery systems, becoming a one stop shop for customers.

One cherry on the cake is Xaar’s EPS business in the US which manufactures inkjet printing machines. This is now profitable and may be sold off at some point,  being non-core.  EPS produced £7.8m of gross profit in the past year.

With a £135m market cap there seems to be a lot of business and potential growth here.

I bought Xaar in 2020 at 55p and have subsequently taken profit between 180p and 200p, aside from a few to help keep them on watch.  I bought at 55p because I believed they were great value for a co with so much opportunity. At 200p I feel they had got ahead of themselves price wise.  Going forward they look like they have potential for strong growth at a low valuation.  They have become a one stop shop for print co’s to get the full package from design, ink, ink delivery and the print heads.  They have net cash and the potential to sell off EPS to raise even more cash if needed to focus.  There has been delays due to China shut down and the decision to onshore most of their China production.  This may have knocked faith to a degree, rightly or wrongly.  We are nearing the time when Xaar has to start clearly delivering imo.

The 2022 results presentation is worth watching:

Xaar H1 ends on June, 30. H1 trading statement should be mid July.  I think being up to speed with what is going on at the company would be worthwhile ahead of the update so that you can react accordingly.  Xaar are opening up huge markets for themselves with some fabulous new and ground breaking products. The potential here is huge if they can deliver on what they have promised.  Probably wisest to watch and wait for now but pay attention when the trading update is released.

All of this, just my opinion. Do your own research and verification.