The Investment Column: Xaar nobbled by undercutting licensees in Japan

H&T; Wellstream
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The Independent Online

Our view: Avoid

Share price: 108.25p (-13.25p)

Xaar will not pick up any gold medals for its performance in China this year. A wooden spoon, perhaps. The print technology group was hammered in July when it warned sales in China, its most important market, were slowing down. Business has not got any better.

Xaar's patented print heads allow high-quality printing on plastic, paper and other materials. The advertising and consumer goods industries are major users. But the graphics market in China has slowed down, perhaps because of the Olympics or the Sichuan earthquake. Whatever, it will have a major impact on the year's results.

The other problem for Xaar is that it is being nobbled by its own licensees. Somewhat bizarrely, they have been free to undercut Xaar, owing to less than watertight arrangements reached years ago. The licensees, Japanese electronics firms, are taking advantage of low-cost manufacturing to flood the market with the same printers as those from Xaar but at much lower prices.

Xaar is hitting back by introducing a new generation of equipment offering higher-definition printing but this is a fairly long-term response and the company admits it is unlikely to claw back market share.

On the plus side, business outside of China is doing well. Sales into Europe and the Americas grew by 15 per cent and 26 per cent respectively. India now accounts for 10 per cent of the total.

Xaar believes it will turn the corner when its latest technology offering faster and more versatile printing for customers in the packaging industry becomes more widely adopted but this could be someway off.

At the halfway stage it earned slightly higher profits of £3.7m on sales 4 per cent lower at £22.4m. But lower sales in China will hit the second half, prompting the company broker Landsbanki to reduce its full-year forecast by £1m to £6.4m.

The latest setback has revived talk that the US group Danaher, which was in bid talks last year, may return. For now there is little reason to chase the shares.


Our view: Buy

Share price: 177.5p (-1p)

In these days of bewilderingly complex financial instruments, it is odd to think that pawnbroking still survives. H&T is the quoted vehicle likely to be visited by those needing to raise some cash from gold rings or granny's old diamond broach.

Apparently demand remains fairly constant around the year driven by customers, generally those who do not have bank accounts, anxious to raise cash – typically about £120 – by handing over their trinkets as security and reclaiming them at a higher cost a few weeks or months later. H&T can charge a maximum of 8 per cent per annum on advances to customers. So someone handing over £100 of goods would have to pay £124 to recover them three months later.

The high bullion price has proved a windfall as more people have been tempted into its shops to sell rings and jewellery. The profit on scrap sales during the first half rocketed from £700,000 to £2.4m. Group profits doubled to £5.2m.

A venture into a cheque cashing service was aborted and the two shops used for the pilot scheme converted to pawnbroking, taking total outlets to 90. That should rise to 100 by the year end with sites targeted in lower income areas.

Around a quarter of sales are generated in the final quarter of the year and H&T is taking a cautious view on prospects. Customers tempted to raise money for Christmas may decide to keep that gold watch under lock and key instead.

With full-year profits forecast to reach £9m delivering earnings per share of 18.6p the shares look good value.


Our view: Buy

Share price: £11 (-10p)

Wellstream is one of the leading suppliers of flexible pipelines used to carry oil from the world's ultra-deep offshore fields. It has just won its largest order to provide 700km of pipeline to the Brazilian state-owned oil company Petrobras.

The contract is for flowlines – the pipes that run along the ocean floor – and risers, the pipes that carry oil to the surface. Manufacturing will be at its Newcastle base and at a new plant in Brazil.

Wellstream is one of only three global players in the sub-sea flexible pipe market. But just two firms, Wellstream and its rival Technip, have 60 per cent of the market for exploration in super-deep waters.

This makes the British firm a serious player supporting an industry forced to test the boundaries of exploration as oil deposits in more accessible locations become depleted. Research by the energy analysts Douglas-Westwood say expenditure on deep water exploration will top $24bn by 2012.

Until now Brazil, Africa and the Gulf of America have been the focus of most exploration activity but attention is also switching to areas of Asia. Wellstream floated in April last year at 320p and peaked at £14.72p in May retreating on the back of the falling oil price.

Broker Evolution expects 2008 profits of £75m to advance to £148m by 2010. At 21 times future earnings and buoyed by a rich order book, the shares do not look expensive.