Xaar. Update. Investment summary: Ceramics heating up. Price 248.5p Market Cap 177m. Results in line with upgraded expectations. Ceramics heating up

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Update 27 March 2012 Xaar Price 248.5p Market Cap 177m Year End Revenue ( m) PBT* ( m) EPS* (p) DPS (p) P/E (x) Yield (%) Share price graph 12/10 54.7 5.6 6.3 2.5 39.5 1.0 12/11 68.8 10.7 10.8 3.0 23.0 1.2 12/12e 78.9 14.5 14.7 3.0 17.0 1.2 12/13e 92.4 19.3 19.5 3.0 12.8 1.2 Note: *PBT and EPS are normalised, excluding acquired intangible amortisation, exceptional items and share-based payments. EPS is diluted. Investment summary: Ceramics heating up Xaar s full year results capped an excellent year, with 26% sales growth driven by a strong performance in ceramics and better than expected execution on the capacity build out. Competition is emerging in ceramics, but we feel Xaar has a technology lead, and an increased rate of product innovation should maintain healthy market share, while potentially recovering some in graphic arts. Delivery to our estimates and evidence of growth continuing into 2014 should drive the share price above 300p. Results in line with upgraded expectations Following a number of upgrades over 2010 and 2011, results were as flagged at the January IMS, with sales growing 26% year-on-year, adjusted PBT by 90% year-on-year and adjusted EPS by 72% to 10.7p. Net cash ended at a robust 17.4m, while the dividend has been increased by 20% to 3.0p. Ceramics heating up Growth continues to be driven by uptake of digital printing for ceramics production, which drove 124% sales in the industrial segment to 31.5m and the end market should support plenty more growth beyond this. Unsurprisingly, competitors are now targeting this segment more aggressively with lower-priced products, to which Xaar is likely to respond with price reductions of its own. A more structured approach to and increased investment in R&D is also now translating into an accelerated rate of new product launches. This will be key to staying ahead in ceramics, recovering market share in graphics and opening up new applications for Xaar s technology. Valuation: Delivery to plan should drive further upside Our headline estimates are largely unchanged and the 2013 rating of 12.8x is now a discount to other UK high value-added electronics suppliers (average 15x). If Xaar continues to deliver, further demonstrating evidence that growth will continue into 2014, then the shares will continue to appreciate beyond 300p. The key catalysts for de-risking the longer-term growth story are the demonstration of its ability to counter price competition and retain a strong market share in ceramics, bringing more labelling partners to volume production and recovering market share in graphic arts. Share details Code Listing Sector Shares in issue XAR FULL Electronic Components and Equipment 71m Price 52 week High Low 295.0p 210.5p Balance Sheet as at 31 December 2011 Debt/Equity (%) N/A NAV per share (p) 86 Net cash ( m) 17.4 Business Xaar designs and manufactures inkjet printheads. Its Platform 1 products are used primarily for outdoor advertising. Platform 3 widens the addressable market to include industrial, labelling and other applications. Valuation 2011 2012e 2013e P/E relative 373% 219% 178% P/CF 23.1 12.5 9.5 EV/Sales 2.5 2.3 2.0 ROE 8% 13% 15% Geography based on revenues (2011) EMEA Asia Americas 61% 28% 11% Analyst Dan Ridsdale +44 (0)20 3077 5729 tech@edisoninvestmentresearch.co.uk Xaar is a research client of Edison Investment Research Limited

2 Edison Investment Research Update Xaar 27 March 2012 End markets update Company description: An IP-underpinned component manufacturer Xaar is the leading independent supplier of industrial inkjet printheads globally and, as such, the UK s strongest play on the global transition to digital printing. It rose to prominence in the wide format graphic arts and case coding markets, both of which are now mature, but which continue to provide important income streams. The development of higher resolution and lower maintenance (P3) printheads opened up a much broader range of end markets. Demand for these products has surged over the past 18 months, driven mainly by adoption of the technology for ceramics production, to the extent that capacity had become significantly constrained. The company is now close to completing a 22m capacity expansion programme three months ahead of plan. This should increase P3 production capability more than fourfold from end 2010 levels by mid-year 2012. Ceramics (46% of sales, up 124% year-on-year) Still the primary growth driver Revenue growth of 26% was again driven principally by uptake of P3 printheads in the ceramics production market. Sales into the industrial segment, which embraces Ceramics, grew by 124% year-on-year to 31.5m and now account for 46% of group revenue. As recently as 2009, the segment accounted for as little as 6m sales, illustrating the strength of the technology transition cycle, which Xaar has both enabled and is capitalising upon in Ceramics. As we have previously explored, with an estimated 12,000 ceramics production lines globally, producing 8-10bn square metres of ceramics per annum, demand from this industry could potentially grow to fill much of the expanded capacity within a relatively short timescale. Competition intensifies Unsurprisingly, given Xaar s growth and the prospects within the vertical, the competition is now targeting the Ceramics market more aggressively, most notably Toshiba-Tec, a Xaar licensee with access to the HSS technology, but also Konica and Seiko, both Xaar licensees but not of the HSS technology, and longstanding competitor Dimatix (part of Fuji). Management believes that it still has a technological lead, but now expects double-digit price reductions will be necessary to counter price-based competition from these players. Packaging (17% of sales, flat year-on-year) Broader labelling uptake should stimulate growth Sales into the packaging segment were flat year-on-year with growth of P3 into the labelling market offset by declines in P1 sales for case coding. The growth in labelling has come primarily from one OEM partner, which is shipping commercial volumes of machines. The focus this year will be on assisting the company s other four or so key partners progress to volume shipments.

3 Edison Investment Research Update Xaar 27 March 2012 Graphic Arts (26% of sales, down 15% year-on-year) Price competition hurting, new products key to a recovery The graphic arts segment, where P1 sales into outdoor advertising applications were once the mainstay of the business, saw sales fall by 15% year-on-year to 18.1m as a result of market share losses and price declines. The outdoor advertising market is now mature and largely made up of replacement sales, but it is still sizeable and it is hoped that the launch of higher-resolution P1 heads later this year, followed by a head incorporating the P3 circulating ink technology in 2013 will drive a recovery in market share. Investing in keeping a lead With profits buoyed by P3 uptake, Xaar is now in a position to invest back into the business. Total R&D spend increased by 16% over the course of the year to 5.8m (cash spend increased 22%). This is expected to increase further this year in order to retain Xaar s competitive advantage in Ceramics, recover market share in Graphic Arts and also to seed longer-term opportunities. Exhibit 1: Printhead enhancement plans Enhancements Target market Development/launch schedule P1+ Smaller drop size, to Graphic arts Commercial launch mid 2012 enable a better resolution P3 GS12 Larger drop size, to enable better colour intensity Ceramics Commercial launch mid 2012 P3+ Combining the HSS ink feed technology into printheads for the Graphic Arts market P4 Significant improvement in speed and resolution of current heads Source: Edison Investment Research, Xaar Graphic arts Sampling mid 2013 Volume sales 2014 New segments Commercial print, textiles Capacity build on track, now significantly de-risked Initial test structures expected midyear to ascertain viability. Prototypes by year-end 2012. Possible volume shipments 2015/16 if initial trials are positive. The capacity build-out programme remains on track for completion by June this year, and, with the major clean room now in place, execution risk has substantially reduced. Once complete, at full utilisation the facility should be able to produce 45k P3 printheads per annum so we do not anticipate the need for any significant further investment in capacity expansion in the near to medium term. Our revenue estimate for 2013 assumes production of 40k heads, 89% of the 45,000 capacity in 2013, but beyond that capacity should be able to be increased incrementally, within a 4-6m annualised capex budget. The 45k figure is also based on working two shifts per day, which could be expanded to three if constraints become apparent. Update on China Management and other staff have been consulting directly with their Chinese customers following the resignation of Xaar s Chinese team in the new year (detailed in our note Chinese workforce resigns). Clearly the situation has been far from ideal, but business in 2012 is not expected to be impacted. China will now be served by a newly established Hong Kong office.

4 Edison Investment Research Update Xaar 27 March 2012 Estimates Our headline estimates are essentially unchanged. Sales into the industrial segment, driven by ceramics, will remain the primary driver of growth, although we are forecasting a return to growth in packaging, driven by more labelling partners moving to volume production. We forecast further declines in graphic arts this year, but a modest recovery in 2013 driven by new product launches. On these estimates, the company sells 27k P3 heads in 2012 (77% of 2012 production capacity) increasing to 40k in 2013 (89% of capacity) with peripherals and ink commissions growing at a similar rate to P3 printhead sales. We assume that average P3 printhead prices fall by 12% this year and 10% next year. Our 2012 gross margin is nudged up to 46.1% from 45%, but this is offset by higher opex. While the increase in gross margin may seem counterintuitive given the expected price reductions in ceramics, gross margin expanded by 60bp from H1 to H2 in 2011 despite upfront loading of costs associated with capacity expansion. With higher sales volumes, overhead recovery will improve and should result in gross margin expansion. Our forecast operating margin of 21% for 2013 is clearly a significant expansion on recent years, but compares to the company s previous peak of 24% when P1 market share was at its apex. A reduction in the forecast tax charge from 26% to 25% brings EPS up marginally by 1.3% for 2012. Exhibit 2: P&L Model Sales ( m) 2010 2011 2012e 2013e Graphic arts 21.4 18.1 17.2 18.9 Packaging printing 11.8 11.7 13.5 15.5 Industrial printing 14.1 31.5 40.8 50.6 Total printheads and related 47.3 61.4 71.5 8 5.0 Licence, royalty and development fees 7.4 7.4 7.4 7.4 Total sales 54.7 68.7 78.9 92.4 Variable COGS (14.3) (18.4) (19.9) (23.6) Variable margin 74% 73% 75% 74% Cash fixed COGS (13.0) (14.1) (15.3) (16.3) Depreciation (4.5) (5.8 ) (7.3) (10.0) Fixed COGS (17.5) (19.9) (22.6) (26.3) Total COGS (31.8 ) (38.3) (42.5) (49.9) Gross Profit 22.9 30.4 36.4 42.5 Gross Margin 42% 44.2% 46.1% 46.0% Opex ex adjustments (17.3) (19.8 ) (22.0) (23.4) EBIT Adjusted 5.6 10.5 14.4 19.1 EBIT Margin 10% 15% 18 % 21% Source: company data Return to strong cash generation We forecast that net cash expands from 17.4m at the end of 2011 to 19.3m at year-end 2012 despite a further 11m capex, as the capacity build programme completes, 1.3m of capitalised development costs and a 2.2m outflow from the increased dividend payment. Once capex falls back to maintenance levels ( 6-8m), the company should return to a highly cash generative state.

5 Edison Investment Research Update Xaar 27 March 2012 There is clearly scope for further dividend expansion, although we believe that management is also likely to retain a strong balance sheet as a cushion for disruptions and as collateral to accelerate growth in the business. Valuation We feel that if Xaar can deliver to our estimates, and show evidence that good growth will continue into 2014, then the shares will continue to appreciate beyond 300p. The key catalysts for de-risking the longer-term growth story are the demonstration of its ability to counter price competition and retain a strong market share in ceramics, bringing more labelling partners to volume production and recovering market share in graphic arts. Although the company lacks any direct peers upon which to base a comparative analysis, the rating of 17.0x this year s earnings, while a growth rating, is not out of kilter with other high valueadd electronic suppliers. For 2013 (the first full year to benefit from the expanded capacity being on line) the rating drops to a discount to this peer group. If Xaar s superior growth rate to this peer group can be maintained, then it should move to a premium. Exhibit 3: Peer comparison (prices as at 20 March 2012) Share Price (local) Market Cap (local m) Company Reporting Currency Current EV/S Next EV/S Current P/E Next P/E Xaar PLC GBP 248.5 177 2.0x 1.6x 17.0x 12.8 x UK High Value Add Electronics Renishaw PLC GBP 1,349.0 982 3.0x 2.8 x 16.6x 14.7x Gooch & Housego PLC GBP 400.0 87 1.5x 1.5x 15.3x 13.9x Andor Technology Ltd GBP 509.0 156 2.2x 2.0x 19.4x 17.3x Global Printing Domino Printing Sciences PLC GBP 559.5 622 1.9x 1.7x 15.1x 13.5x Electronics for Imaging Inc USD 16.6 761 0.8 x 0.8 x 13.1x 11.5x Toshiba TEC Corp JPY 332.0 95,664 0.1x 0.1x N/A 14.6x Seiko Epson Corp JPY 1,167.0 233,18 7 0.3x 0.3x N/A 14.4x Source: Bloomberg, Edison Investment Research On an absolute basis, a reverse DCF suggests that the current share price is broadly factoring in performance to our estimates through 2013, followed by a flattening of revenues and steady state margins of 21%. Thus it is not pricing in the company s clear growth potential beyond our forecast period. Exhibit 4: DCF share price sensitivity to mid-term growth and EBIT margin variances Sales growth 2014-2018 241.72 0.0% 2.5% 5.0% 10.0% 20.0% 16.7% 196 209 223 255 338 19% 212 227 243 28 0 374 21% 229 245 263 304 410 23% 245 263 28 3 329 446 25% 261 28 1 303 353 48 2 Source: Edison Investment Research EBIT Margin 2014-2018

6 Edison Investment Research Update Xaar 27 March 2012 Exhibit 5: Financials m 2009 2010 2011 2012e 2013e Year end 31 December IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 40.1 54.7 68.8 78.9 92.4 Cost of Sales (23.3) (31.8) (38.3) (42.5) (49.9) Gross Profit 16.8 22.9 30.5 36.4 42.5 EBITDA 6.8 10.4 16.6 22.1 29.4 Operating Profit (before GW and except) 2.0 5.6 10.6 14.4 19.1 Intangible Amortisation 0.0 0.0 0.0 0.0 0.0 Exceptionals (3.5) 0.9 (0.2) 0.0 0.0 Other 0.8 (1.3) (1.3) (1.3) (1.3) Operating Profit (0.8 ) 5.2 9.2 13.1 17.8 Net Interest 0.1 (0.1) 0.0 0.1 0.2 Profit Before Tax (norm) 2.1 5.6 10.7 14.5 19.3 Profit Before Tax (FRS 3) (0.7) 5.2 9.2 13.2 18.0 Tax 0.7 (1.4) (2.7) (3.6) (4.8) Profit After Tax (norm) 2.1 4.1 8.0 10.9 14.5 Profit After Tax (FRS 3) 0.0 3.7 6.5 9.6 13.2 Average Number of Shares Outstanding (m) 61.8 63.0 70.9 71.1 71.1 EPS - normalised (p) 3.4 6.5 11.3 15.3 20.3 EPS - normalised fully diluted (p) 3.4 6.3 10.8 14.7 19.5 EPS - (IFRS) (p) 0.0 5.9 9.2 13.5 18.5 Dividend per share (p) 2.5 2.5 3.0 3.0 3.0 Gross Margin (%) 41.9 41.9 44.3 46.1 46.0 EBITDA Margin (%) 16.9 19.0 24.1 28.0 31.8 Operating Margin (before GW and except) (%) 5.0 10.2 15.4 18.2 20.7 BALANCE SHEET Fixed Assets 21.6 23.7 33.9 40.5 39.0 Intangible Assets 5.8 5.1 5.1 5.5 6.0 Tangible Assets 14.5 17.4 27.6 33.8 31.8 Investments 1.3 1.3 1.3 1.3 1.3 Current As s ets 25.1 44.7 40.7 49.4 66.2 Stocks 5.8 10.7 11.8 15.7 19.6 Debtors 7.6 9.3 9.4 11.8 13.9 Cash 11.5 23.3 18.3 20.5 31.4 Other 0.2 1.4 1.3 1.3 1.3 Current Liabilities (6.1) (11.5) (10.9) (13.8) (14.7) Creditors (6.1) (11.2) (10.6) (13.5) (14.4) Short term borrowings 0.0 (0.3) (0.3) (0.3) (0.3) Long Term Liabilities (3.4) (2.7) (2.4) (2.4) (2.4) Long term borrowings (0.2) (1.0) (0.6) (0.9) (0.9) Other long term liabilities (3.2) (1.7) (1.8 ) (1.5) (1.5) Net Assets 37.2 54.3 61.4 73.7 88.1 CASH FLOW Operating Cas h Flow 6.9 6.8 14.1 18.7 24.6 Net Interest 0.1 (0.0) 0.1 0.1 0.2 Tax (0.4) (1.5) (1.2) (2.1) (2.8) Capex (5.4) (6.8 ) (15.7) (12.3) (8.8) Acquisitions/disposals 0.0 0.0 0.0 0.0 0.0 Financing 0.0 13.9 0.2 0.0 0.0 Dividends (1.5) (1.5) (1.8 ) (2.2) (2.2) Other 0.0 (0.1) (0.1) (0.1) (0.1) Net Cash Flow (0.3) 10.6 (4.4) 2.2 10.9 Opening net debt/(cas h) (10.8) (11.3) (22.0) (17.4) (19.3) HP finance leases initiated 0.0 0.4 (0.2) (0.3) 0.0 Other 0.8 (0.3) (0.1) 0.0 0.0 Clos ing net debt/(cas h) (11.3) (22.0) (17.4) (19.3) (30.3) Source: Company data, Edison estimates EDISON INVESTMENT RESEARCH LIMITED Edison Investment Research is a leading investment research company. 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