Xaar rout not over

Talk about kicking a dog when it's down. Just a day after Xaar issued another crushing profits warning - its third since June - Investec Securities has slashed forecasts and reckons shares in the ink-jet printer technology specialist have much further to fall.

"The cause is the same, a weak Chinese construction market, where the outlook has deteriorated further, with no sign of recovery for at least 12 months, the company believes," writes the broker. "We see risk of another profit warning, albeit likely smaller in absolute terms and will only look at turning more positive once it is clear that earnings have bottomed."

Well that could be a while. Investec cuts its 2014 revenue forecasts to £100 million - far less than the £115 million guessed at by Xaar chiefs - and by a quarter for 2015 to just £85 million. Even with massive staff cuts planned, adjusted earnings per share (EPS) estimates fall to 20p for this year and by more than half for 2015 to just 12.7p.

We cut our PER (P/E ratio)-based target price to 190p to reflect lower full year 2015 EPS and our UK peer group trading on 15.2x. Given the prospect of further declines in Chinese construction volumes putting more pressure on Xaar volumes/pricing in full year 2015, we remain Sellers until earnings look to have bottomed, albeit we acknowledge that a falling share price leaves Xaar potentially vulnerable to a bid. Our assumed book value of 160p should provide a share price floor.

But there is, at least, light at the end of the tunnel.

Investor confidence in management's ability to guide the market has been shattered and attention is focused on the very short-term view. If we look through full year 2015, there remains significant structural growth drivers as direct-to-shape technology starts to convert the labels market in full year 2016, we believe, and the thin-film technology (P4) remains on track to launch in full year 2017. This could open up new markets many times larger than the current addressable markets.

This chimes with our response on the day of the latest warning:

"That's a very generous rating, given the slump in profits, confidence at rock-bottom and poor visibility. Yes, Xaar is an industry leader in terms of technology, and new products are planned. But the ceramic tile market is hugely cyclical and it could be years before Xaar is back in shape. Until there's tangible evidence that conditions are improving, the volatile shares could struggle to make meaningful progress."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.