Investment Analysis Notes: Zytronic Plc (LON:ZYT)

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Zytronic Stock Ticker: LON:ZYT

Company Activities: Zytronic specialise in the design and manufacture of physical touchscreens (both single touch and multi-touch).

Brand Names Traded As: Patented names for their technology (PCT for single touch, MPCT for multi touch screens), under the Zytronic brand name.

Zytronic Position In Market: Hard to gauge properly but clearly there are many substitutes that give an equivalent touchscreen, but that maybe for generic mass produced screens. For one-off, bespoke products where different product characteristics are required, Zytronic may be a more compelling solution, for example in the casino market.

Zytronic: Who are their competiton? A quick Google shows this market to be competitive. Displaylite, U-Touch, Selectronic are just a few UK firms which offer similar products, as well as the major electronic companies making touchscreens.

Recent Zytronic Trading Updates: Zytronic gave an AGM update on 4 Feb 2020 saying that December and January were ‘considerably’ behind last year but orders have picked up. Previously there was a profit warning last year as orders in the gaming market tailed away, and subsequently the preliminary results showed a decrease in revenues and profits from the previous year.

Zytronic Broker Updates: N-1 Singer released a note on the 4 Feb with the AGM update. Forecasts for this year show a PBT of £2.5m and the dividend per share being trimmed to 11.4p. The level of profit for FY21 does not show much of an improvement, going to £2.6m.

Zytronic CEO and Background: Mark Cambridge: Has been in charge since 2008. Before this has had a long history with the company, rising through the ranks of Technical Manager and Quality Director. Many relevant skills.

Zytronic CFO and Background: Claire Smith: another long-serving member of staff having joined Zytronic in 2007 and being promoted to the CFO role in 2014.

Zytronic Salaries and details of options: Base salary of CEO, £155,000; CFO £95,000. No bonuses vested last year because of reduced profits. Maximum bonuses of 25% based on PBT measures, although a special discretionary bonus can be paid. Both of these numbers are among the lowest seen, but the long service of the directors may signify that a good degree of job satisfaction.

ZYYTONIC FUNDAMENTALS:

Recent Zytronic Results: The last results were the preliminary results. Revenues reduced by approx. 10% due to a large gaming customer reducing orders. Profit before tax was £3.1m which was down from £4.2m a year before. The level of enquiries (but not orders) was higher than the previous year. The February AGM trading note seems to imply that some of these enquiries were converted into orders and should benefit the second half of the year given that turnaround can be quick.

Zytronic Balance Sheet: Good. The company has no debt and at the last annual report had cash balances of £13.1m as well as significant amounts of freehold and long leasehold property. There is a very strong working capital ratio (£20.3m current assets to £1.7m current liabilities). Cash decreased in the last year as the generous dividend payout became expensive relative to cashflow and for the first time exceeded it. Very few intangible assets recognised with only a small portion of development costs capitalised.

Distributions to Zytronic shareholders: A progressive dividend strategy which has ramped up quickly as the company increased profits. It seems that this level of increase will come to an end and the level of dividend will be reduced, perhaps even more than the 11.6p the broker suggests. This would allow the group to increase its cash balances. With the cash balance so high, there has been no need for dilution of shares, and this has stayed relatively stable.

ZYTRONIC QUICK SWOT ANALYSIS:

Zytronic Strengths: With its own large facilities, Zytronic have large capacity for production. They also can produce custom touchscreen products where larger players may not have the interest because of the low volumes, and smaller firms may not have the capability. There are a wide range of applications for this for both touch and multi-touch. Their case studies show a very interesting range of uses from public transport information to gambling machines.

Zytronic Opportunities: Touchscreens are surely going to become more common throughtout the world and could easily replace anything with buttons. Many businesses have driven good efficiencies with the use of touch, for instance selling tickets. The cost of implementation may drop rapidly and there may be further innovations. Greater demand for customisation may favour firms using a company such as Zytronic. The cash balance may lead to acquisitions: many of the other direct competitors are much smaller.

Zytronic Weaknesses: Zytronic own patents for their touchscreen technologies, but clearly not the underlying technology itself. Others are can be substituted in and there are few ways for a customer to tell the difference.  The nature of the business means that revenues are lumpy and sometimes irregular: almost 50% of revenues come from the top 3 customers. The machines, once installed are good for several years and do not need replacement.

Zytronic Threats: Many of the larger contracts (which have larger order quantities) may be at threat as they become viable for other firms to produce. Technology may produce price pressures or competitors delivering better quality sensors, or perhaps another solution which makes touchscreens redundant. Exposure to Asia, especially South Korea.

ZYTRONIC TECHNICALS

Zytronic Share Price and movement: Share price performed well during the glory days, reaching over 600p. The profit warning in the last year knocked this back and it has been decreasing ever since, based on the news that December and January were not good months. At present the longer term picture is decline.

Zytronic Shares outstanding/free float: 16.04m shares outstanding, 14.44m free float (Yahoo Finance)

Recent Zytronic Director trades: No recent trades. Directors acquired shares by exercising incentives.

Zytronic ADVFN Chat/LSE Share Chat Sentiment: Thinly followed. Overall sentiment positive (as it is with many shares.

Feelings: This seems a well-run company. Long-serving directors in charge and a prudent attitude to debt has seen the business well capitalised. Some direction on the cash pile would be good, at these levels a buy-back of the shares may deliver a better return than dividends, and there may be an opportunity cost In having such a level.

One of the questions may be, what has caused the decline from the good days and whether these days will return? Lumpy contracts can affect revenues and that once installed a screen may need no replacement for years, which may give an element of cyclicality to the business. It may be the case that the levels of profitability seen before may not be seen again and the effect of competition will be to reduce operating margins.

Not quite keen to catch a falling share price. The results will naturally have a H2 weighting but any notion of the new orders not completing in H2 could send the share price falling further.

Given the financial position of the company would not be surprised to see this emerge as a takeover target.

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