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Xaar: Making losses, but all is not lost

Publication Date: 23 Oct 2018 - By Manika Premsingh By Manika Premsingh
Actionable
Differentiated

Equity Fundamental Equity UK Technology

There’s no good way to say this: Cambridge-based printing solutions provider, Xaar (LON:XAR), has little going for it right now. Its stock price has declined by more than half its trading value in October, 2017, with the company in the red and little optimism for turnaround in the near future.

For H1, 2018, the company reported revenues of £35.3m, which is a sharp decline from the £44m during the corresponding half of the previous year. This is on account of a softening in its established business lines as well as slow growth in its new products’ demand. Xaar’s revenue streams are divided under three segments – printheads, 3D printing and product print systems. Its established printheads business has taken a knock from weakening in the ceramics market, which is important for Xaar.

Its product print systems segment, which includes direct to shape printing, is still in its nascent stages. The company expects it to grow as the market evolves. However, for now, the company’s expectations are far from optimistic on the whole. It states that “underlying trading since the end of June has been, and is expected to continue to be, below the levels previously anticipated.” in its interim report for 2018.

The fact that the company reported a net loss of £1.1m in H1, 2018, a sharp drop from the £6.7m profit seen in H1, 2017 further indicates the turn for the worse in the company’s fortunes. It has also witnessed a slight softening in its net cash position to £36.8m from £38.3m in H1, 2017.

Bad times for the company, might however, a good time for investing if the future can look positive. The question then is – Can Xaar turnaround?

A closer look at its financials reveals, that at least some recovery is possible. It made a gross profit of £19m in H1, 2018, not significantly smaller than the £21m profit seen in H1, 2017. And this, is despite an almost £9m decline in revenue from the latter period. It is thus driven by a £7m shrinking in cost of sales to £16.2m.

One off increase in other expenses, however, has impacted the operating profits negatively, spilling over into net profits as well. Two heads under these expenses are responsible for driving Xaar into losses in H1, 2018 – research and development expenses and restructuring costs.

The former increased because of capitalisation costs, which is now completed and restructuring costs rose on account of write down of the value of assets to their recoverable levels. If both these costs had been maintained at the levels seen during the previous year, the company would have made a healthy net profit. Added to this is the fact that Xaar also announced redundancies earlier in the year, which will impact costs positively as well.

The upshot is, that while Xaar is by no means a screaming buy, it might be well worth it to check its performance over the next six months to gauge the company’s profit recovery.

  

  

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Manika Premsingh

 

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