Paul Marriage, manager of Cazenove UK Smaller Companies, explains his enthusiasm for manufacturer of industrial inkjet printheads, Xaar
As a specialist investor in the UK smaller companies sector I am fortunate enough to meet some really very interesting companies.
I like to buy UK companies with UK assets. Having briefly run a pan European fund in my time, I rather prefer being a bit closer to the action.
Contrary to much that we read about the UK being an industrial graveyard, I am regularly surprised and enthused by the number of high-tech manufacturing market leaders there are in the UK.
What is more, many of them are public companies, with freely tradable shares and generally high standards of corporate governance, unlike their equivalents in many other global markets.
Xaar, a manufacturer of industrial inkjet printheads, very much fits the bill for me. This is a company with significant product differentiation, protected by IP. It is a world market leader in its niche, generates cash, has no debt, and management that owns stock too.
As one of a cluster of Cambridge-based printing technology stocks that have created significant value for investors since their formation in the 1980s, Xaar is just coming into what may be its most exciting phase.
While desktop printers and the like went digital inkjet a decade ago, the rigours of high speed, high accuracy industrial applications have been much slower to change.
Having initially sold licences to its technology in the 1990s, Xaar moved into manufacturing and selling its own printheads. The company has established itself as a leader in the wide format printing for advertising billboards etc and has grown very strongly with Chinese manufacturers in this market.
The journey thus far has not been trouble free, but leading edge technology rarely is. The second generation product never lived up to high expectations. It has suffered aggressive price competition in Asia from a licensee, and it has cost more and taken longer to get the third generation into the market than patient investors hoped.
However, investment in the latter could be the making of this company. Having now broken into new global industrial applications of ceramic tile and packaging label printing, the take up rate has been impressive. In fact, the planned closure of the Swedish manufacturing facility and transfer to the main Huntingdon site has been reversed as all the capacity in the UK is needed for the ramp up of P3. The shares are valued at 15x forward earnings, a 50% premium to UK smaller companies overall, but there is a realistic prospect of sales and profits doubling over the next five years. And you are paid more than a bank account while you enjoy the ride.
