Xaar Q1 IMS
Edison | Apr 16, 2014 07:41AM ET
Q1 as expected
Xaar (XAR.LSE)’s Q1 IMS confirms that trading has been in line with historic seasonal patterns, with a quiet January and February followed by a pick-up in March. As previously flagged, sales and profit will be substantially more H2 weighted than the exceptional 2013, but the company remains on track to deliver to our full year estimates.
On track for the full year, return to an H2 weighting
Following three years of exceptional, ceramics-driven growth, trading has returned to more ‘typical’ seasonal patterns, with quiet trading during January and February due to the lag from Christmas and Chinese New Year, followed by a pick-up in March. As we flagged in our FY update note, given the exceptionally strong trading in H113, we expect H114 sales to reduce by a mid-to-high single-digit rate, which would leave the company with a circa 45/55 H1/H2 revenue split to reach our FY sales estimate. With utilisation dropping back to more usual levels, gross and operating margins will compress in H1, but operational gearing should drive a more marked seasonal improvement in H2, despite higher depreciation charges as new capacity comes on line.
Diversification initiatives on track
Xaar’s product development initiatives, which are key to enabling the company to open up opportunities in new markets, as well as reinforcing the company’s position in ceramics, are also reported to be on track. Conditional on demand from ceramics decoration remaining robust, uptake of products such as the 200nl drop technology (for industrial coatings) and the Xaar 501 (for graphics and packaging) could drive upside to our 2015 estimates. Commercial progress over this year should give better visibility on the likelihood of this occurring.
Valuation: Diversification the key to upside
Xaar’s rating is on a par with its most direct peers and looks undemanding given the company’s growth potential, IP, cash generation and margins. However, it is in a transitional phase, having moved from a capacity constrained situation to a demand-dictated one, and with growth more dependent on success in new, unproven markets. If the company delivers to plan over the course of this year, this transitional risk should progressively wane and the potential for new products to drive a new wave of growth should become clearer. Better visibility on this front should be a catalyst for the shares to rerate upwards.
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