Britain’s small but resilient manufacturing sector is officially booming. “UK manufacturing ends 2010 on a high,” declared the FT last week; another called it “a spectacular end” to the year; “UK manufacturing will lead UK’s economic recovery,” trumpeted a third.
Encouraging headlines like these are down to the determination, creativity and industriousness of businesses up and down the country. There are plenty of stirring stories to tell about these businesses – and some of the most impressive are to be found in the world of penny shares.
Take the printhead specialist Xaar (LON:XAR), for example. This is a company that is expecting sales to double in the next few years and is also looking for 250 new staff. In other words, this is a company whose performance is precisely the sort which has given rise to these encouraging headlines.
Last week I visited Xaar’s headquarters just outside Huntingdon. When I arrived, chief executive Ian Dinwoodie made no secret of the fact that Xaar is currently prospering. But it’s also a pivotal time for the company. Key to its prospects is the transition of the printing industry from analogue to digital, and a particular innovation that promises to secure a major new market
The small black box behind a printing revolution
As Dinwoodie explained, printing has traditionally relied on creating an image on one surface and then transferring it to another. This is all very well for large print runs, but the time and effort taken to make the original image makes it less efficient for short print runs.
This is where digital printing has an advantage. Images can be altered on screen, just as you might do on your home computer, and the changes can be automatically and instantly transferred to the printed copy.
The printhead is the key to this. This small black box receives the ink and then spurts it out on to the printed surface in a rapid series of tiny droplets, each one of which is propelled by an electric pulse. These cost around £100 each and Xaar sold about £50m worth last year. With half of its sales going to Asia, especially China, it is a world leader in the business.
Progress though is necessarily slow. Xaar’s customers are the world’s big makers of printing machinery, who sell their machines on to the commercial printers. The printer manufacturers incorporate Xaar’s printheads into their machines, but not before a long process of integration and testing.
Meanwhile the commercial printers are even slower to move. This is partly because they have made big investments in expensive analogue printing machinery that they do not wish to write off. But it’s also because analogue printing can be more economic, depending upon the type of job and, crucially, the size of the print run.
Nonetheless the industry is making the transition from analogue printing to digital – and that presents a huge opportunity for Xaar.
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The thriving market in tile printing
Xaar’s printheads are already widely used for the printing of roadside posters and bar codes. Label printers are gradually adopting digital printers, but the market that is expected to power Xaar’s growth is that of ceramic tiles.
Ceramic tiles are typically manufactured in huge plants, with slurry going in at one end and the coloured and glazed tile coming out at the other. Along the way the tiles are carried on a conveyor belt under a roller printer that imparts an image.
A problem is that the roller must exert a certain degree of pressure and this can break the tile. The replacement of this roller with an ink-jet printer overcomes this problem and also allows the tile manufacturer to improve the quality and variety of his designs.
However one other innovation has been necessary and this is where Xaar’s ‘Platform 3′ technology is opening up the market.
The technological advance that will power Xaar’s growth
The biggest problem with ink-jet printers, Dinwoodie told me, is that air can find its way into the tiny tube through which the ink droplet is projected. This air can act as a cushion. Rather than finding its way down and through the tube the ink droplet simply bounces back, ruining the finished design.
To overcome this, the printer must purge itself of air – this is what your desktop printer is doing when it starts to splutter and growl. For this it must pause, and that of course means halting the entire ceramic tile production line.
What Xaar has come up with is a method of constantly moving the ink around the printhead while at the same time firing it out on to the printed surface. This ensures that any air pockets are prevented from blocking the ink.
Ceramic tile manufacturers are especially keen to adopt this technology, and Dinwoodie says that he has never seen such an exciting business opportunity. Having raised £14m through a placing of new shares at 170p in November, Xaar is gearing up to meet demand.
I would like to be able to conclude by telling you that the shares are cheap. But trading on nearly 30 times this year’s forecast earnings, they already discount considerable progress. Nonetheless, Xaar’s is just one of many exciting growth stories that penny-share investors can look forward to discovering as UK manufacturing fuels our economic recovery in 2011.
• This article was first published in Tom Bulford’s twice-weekly small-cap investment email
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