2014 has been a tough year for Xaar (LSE: XAR). Thanks to a slowing Chinese property market, which has hit demand for the group’s printed ceramic tiles, the company has issued several profit warnings this year and its share price has collapsed by nearly 75%.
However, Xaar released an upbeat trading statement this morning, revealing that full-year revenue for 2014 will be approximately £108m, at the high end of management’s expectations.
Management had previously expected full-year revenue to fall within the range of £100m to £110m. Although at the beginning of this year the group was expecting full-year revenue in excess of £130m. So, it’s not all good news.
Still, Xaar’s management has acted quickly to contain group costs and ensure that the company continues to trade profitably. During November and December Xaar cut its staff headcount by 20% and factory operating costs have been reduced. This cost cutting should offset falling revenue.
Leaving 2014 behind
Xaar’s poor performance during 2014 can be traced to a step-down in Chinese demand for ceramic tiles during the third quarter. Admittedly, this was outside of Xaar’s control and was related to a fall in construction activity within China. Xaar’s exposure to China is significant, as almost half of the world’s ceramic tile output is reported as manufactured and consumed in China. Ceramic tile sales represented around two thirds of the Group’s sales during 2013.
Management expects the slow-down in tile demand to last throughout 2015 and is estimating that group revenue for 2015 will be around £100m, nearly 8% below the figure expected for this year.
Nevertheless, with costs falling, the group should be able to maintain or even increase its profit margins, keeping profitability steady, while revenue declines. Management has stated that cost cutting activities should reduce overall costs by 15%.
Crunching numbers
Unfortunately, the City’s figures for Xaar are rather misleading and do not reflect management’s own forecasts. For example, according to City analysts, Xaar’s revenue will fall to £89m next year — a full £11m below management’s current expectations. City analysts are also predicting revenue of £103m for this year, once again below the £108m projected by management.
But if you factor in management’s own figures, the group’s outlook does not seem so dismal. In particular, historically Xaar has reported a pre-tax profit margin of 20% to 30%, a pre-tax margin of 26% was reported for the first half this year. Assuming that this margin remains constant thanks to cost cutting, and based on the fact that Xaar has just over 77m shares in issue, the company could be in line to report earnings per share of just under 34p for full-year 2015 on sales of £100m.
These back-of-the-envelope figures indicate that at present levels, Xaar is trading at a forward P/E of 8.9.
Moreover, during the last few months, Xaar’s management has been busy buying as many shares in the company as they can get their hands on. The CEO has purchased in excess of 20,000 shares, the CFO has bought almost 7,000 shares and the R&D Director has purchased nearly 40,000 shares, his wife has purchased another 16,000.
Don’t take my word for it
My figures above are only rough estimates and you should always conduct your own research before making a trading decision. However, the figures do indicate that Xaar could be a great bet for 2015.
