Xaar plc (LON:XAR): A 26% Undervalued Opportunity in Industrial Inkjet Innovation

For investors seeking undervalued opportunities in the industrial technology sector, Xaar plc (LON:XAR) stands out as a compelling case. With a current share price of £1.24 and a DCF-derived intrinsic value of £1.68, the stock is trading at a 26% discount to its estimated fair value. This mispricing, driven by short-term market skepticism and underappreciated long-term growth drivers, presents a timely entry point for those willing to bet on Xaar's transformative role in emerging markets like EV battery coating, automotive printing, and desktop 3D printing.

The DCF Case: A 26% Margin of Safety

A two-stage DCF model underscores Xaar's undervaluation. The company's projected free cash flows over the next decade, combined with a terminal value based on a conservative 2.5% growth rate (aligned with the UK 10-year bond yield), yield a total equity value of £133 million. Dividing this by the 79.1 million shares outstanding results in an intrinsic value of £1.68 per share. At £1.24, Xaar is significantly undervalued, offering a 35% potential upside if the model's assumptions hold.

The DCF's robustness lies in its assumptions:
- Discount Rate: 8.4%, derived from a levered beta of 1.137, reflecting Xaar's moderate volatility relative to the market.
- Growth Rates: Free cash flows are projected to grow at a declining rate over 10 years, mirroring typical business cycles, before stabilizing at 2.5% post-2035.
- Terminal Value: The largest component of the valuation (85% of total equity value), this assumes Xaar's recurring revenue streams from printhead replacements will sustain long-term cash flow.

Growth Catalysts: Industrial Disruption in High-Growth Sectors

Xaar's intrinsic value is not just a number—it's a reflection of its strategic pivot into markets with explosive potential.

1. EV Battery Coating: A £260M+ Market Opportunity

Xaar is the sole provider of inkjet printheads for EV battery coating, a market poised for rapid adoption. Partnerships with Omijia and Shifang have already deployed Xaar-enabled coating lines, achieving 99% yield efficiency compared to traditional spray painting. With 1,300 global EV battery production lines expected to adopt this technology, Xaar could capture £260 million in initial revenue. The recurring revenue model—printhead replacements every two years—adds durability to cash flows.

2. Automotive Coating: A 30% CO2 Reduction Play

A partnership with Axalta and Dürr is set to revolutionize automotive painting. Xaar's recirculating TF Technology reduces CO2 emissions by 30% and labor costs by 50%, making it a green alternative for automakers. If just 1% of the 90 million annual cars produced adopt this technology, Xaar's revenue could surge by hundreds of millions of pounds.

3. Desktop 3D Printing: Democratizing High-Quality Production

Flashforge's new £2,400 3D printer, powered by Xaar printheads, is priced at a fraction of competitors' costs. This democratizes access to high-resolution, full-color printing, with recurring printhead sales creating a sticky revenue stream. The desktop 3D printing market, currently at 1 million units annually, could expand exponentially as adoption accelerates.

Strategic Diversification: Mitigating Risk, Expanding Margins

Xaar's diversification into textiles, corrugates, and wax printing reduces reliance on cyclical markets. The Aquinox printhead, now used by textile leader M&R, has cut product launch timelines from three years to six months, unlocking £20 million in annual revenue. Similarly, a three-headed wax printer launched in 2025 targets the jewelry and dental sectors, further broadening Xaar's addressable market.

Institutional Confidence and Financial Health

Xaar's recent leadership changes and operational restructuring signal renewed institutional confidence:
- Paul James, former CFO of Biffa and Genuit, joined in January 2025 to strengthen financial discipline.
- A net cash position of £8.7 million (up 23% YoY) and a debt-to-equity ratio of 0.9% highlight a strong balance sheet.
- Divestitures of non-core assets (Life Sciences, Xaar 3D) and cost-cutting measures have improved operational efficiency.

Why Invest Now?

Xaar's 26% undervaluation is a function of market underappreciation for its emerging market exposure and recurring revenue model. While the DCF assumes conservative growth rates, the company's real-world partnerships and product launches suggest actual cash flow growth could outpace projections. Analysts have set a price target of £1.95, 16% above the DCF fair value, reflecting optimism about Xaar's ability to capture market share in high-growth sectors.

Risks and Mitigation

• Market Adoption: If EV battery coating or 3D printing adoption slows, Xaar's growth could lag. However, its partnerships with industry leaders (e.g., Flashforge) provide a runway for scaling.
• Competition: No direct competitors in EV battery coating, and Xaar's 24% CAGR in revenue from post-2019 product launches demonstrates technological differentiation.

Conclusion: A Mispriced Innovator

Xaar plc is a rare blend of undervaluation and high-conviction growth drivers. Its DCF valuation, supported by recurring revenue streams and strategic entry into multi-billion-dollar markets, justifies a buy recommendation for investors with a 3–5 year horizon. The stock's current discount offers a margin of safety, while its long-term potential—powered by industrial inkjet innovation—positions it as a standout opportunity in the industrial tech sector.

Investment Advice: Accumulate shares at current levels, with a target of £1.68 (intrinsic value) and a long-term outlook for appreciation as Xaar's emerging market bets materialize.