Investec downgrades Xaar but likes long-term print story

Investec has downgraded Xaar to 'hold' on valuation grounds and lowered forecasts but said it continued to like the long-term structural growth opportunity for the printing technology group.

Following a reassuring trading update in January, last month Xaar announced a new 2020 revenue target of £220m.

This plan is based on maintaining ceramics printing at current levels; launching the next-generation P4 and thin-film technology based printheads into various end markets; growing the packaging printing business to circa £50m through continued momentum in primary labels and the commercialisation of 'direct-to-shape' technology; and developing its 3D printing offering and commercial partnerships.

Selective acquisitions may also play a part.

"We have analysed the potential for each of these growth drivers and conclude the target is achievable," Investec said, but that it comes with "significant" execution risk as the print market conversion is inherently prone to delay.

Publishing new forecasts for the next four years, analyst Thomas Rands lowered his 2017 pre-tax profit forecast by 55% to £8.2m based on a recent accounting change.

And while the £220m by 2020 is "credible", Rands takes a more conservative stance in forecasting £160m, acknowledging the gap could be filled by a combination of £20m-£30m of M&A revenue, higher volume of P4, DTS and Xaar Print Bar products.

With the next catalyst being the P4 launch in June at Drupa print media fair, the price target was trimmed to 490p from 510p.