EV Battery And Automotive Coating Adoption Will Transform This Industrial Inkjet Supplier

Catalysts

About Xaar

Xaar develops and sells industrial inkjet printheads and related systems used in applications such as jewelry wax, EV battery coating, automotive coating and desktop 3D printing.

What are the underlying business or industry changes driving this perspective?

• Rapid adoption of Xaar 2002 printheads in the jewelry wax market, where the company now supplies 4 of the 5 largest OEMs and is pursuing a majority share, directly supports higher printhead revenue and a growing stream of replacement sales that can feed earnings.
• Early traction in EV battery insulation, where industry partners report intent to make inkjet coating the default solution across an installed base of roughly 1,300 Chinese production lines, points to a larger installed base of heads over time, with a 2 to 3 year replacement cycle that could deepen recurring revenue and support margins.
• Growing interest from automotive manufacturers in digital vehicle graphics, supported by Axalta and Durr’s fee per car model and printhead rental concept, introduces a potentially high volume, high value use case that can lift revenue density per printhead and improve net margins as volumes build.
• The push toward more accessible, full color desktop 3D printing, where Xaar’s high viscosity technology underpins consumer-priced systems and where an early 2.5D full color launch saw sales multiples above initial expectations, supports a larger addressable unit market that can scale printhead revenue and help spread fixed costs across higher earnings.
• Ongoing focus on higher viscosity, higher value industrial applications, while maintaining substantial unused manufacturing capacity and a healthy net cash balance of £5.1m, positions Xaar to meet increased order volumes without heavy incremental CapEx, which can support gross margin resilience and operating leverage into future revenue growth.

Assumptions

This narrative explores a more optimistic perspective on Xaar compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Xaar's revenue will grow by 21.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -18.3% today to 5.9% in 3 years time.
• The bullish analysts expect earnings to reach £6.7 million (and earnings per share of £0.31) by about January 2029, up from £-11.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 29.6x on those 2029 earnings, up from -7.1x today. This future PE is lower than the current PE for the GB Tech industry at 60.1x.
• The bullish analysts expect the number of shares outstanding to decline by 0.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.64%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The bullish view leans heavily on rapid adoption of Xaar printheads in EV battery coating and automotive graphics, but the company itself highlights that car manufacturers are unpredictable in adopting new technology and that the exact timing of meaningful revenue in these markets is uncertain, which could leave revenue and earnings short of expectations for several years.
• EPS, the U.S. systems business, is currently a drag on group profitability, with revenue 16% lower year on year at £6.3 million and sensitive to U.S. tariffs, so a prolonged period of weak capital spending or further trade barriers could keep group margins under pressure and delay a move from a £700,000 loss before tax to consistent earnings.
• The Printhead division is still exposed to more commoditised ceramics and glass markets where pricing has been under pressure, and management has already accepted lower pricing to defend share with a key customer, which could limit gross margin expansion even if volumes in higher value applications grow.
• The group is investing heavily in R&D and capital equipment, with a £3.6 million net cash outflow in the half and a plan to keep R&D at a high single digit share of revenue, so if new markets like desktop 3D printing and EV batteries scale more slowly than hoped, cash could tighten and returns on this spending could fall short of what is needed to support higher earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Xaar is £2.0, which represents up to two standard deviations above the consensus price target of £1.7. This valuation is based on what can be assumed as the expectations of Xaar's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.0, and the most bearish reporting a price target of just £1.4.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be £114.3 million, earnings will come to £6.7 million, and it would be trading on a PE ratio of 29.6x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of £1.04, the analyst price target of £2.0 is 48.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.