Small Cap Value Report (10 Sep 2014) - ZYT, PTY, ANP, THT

10th Sep '14 by Paul Scott

16 comments 19654 reads

Good morning!

Zytronic (LON:ZYT)

Share price: 246p
No. shares: 15.2m
Market Cap: £37.3m

It's a pleasant start to the day for shareholders in this English maker of high-end touch sensitive screens. The company has issued a trading update today, saying;

The Board is pleased to announce that the increased sales of larger touch products and the significant improvement in margins reported upon at the time of the? Interim results, on 13 May 2014, have continued further into the second half of the financial year.
Group revenue is currently around 8 per cent. above the corresponding period last year, and the Board now expects pre-tax profit for the full year to be significantly above the market consensus.

That's great, but now means we have to play a guessing game to estimate how far "significantly above" means? I tend to guess something like 10-30%-ish is the probable range for "significantly ahead", as regards earnings. That would tie in with an 8% increase in sales, on improved margins. So I'm going to firm up on a guesstimate of about 20% ahead of forecasts.

Valuation - Broker forecast is currently 15.0p EPS for this year (ending 30 Sep 2014). So if I'm right about the company being c.20% ahead, then that points towards roughly 18p EPS for this year. Therefore at 246p this morning, the share price is setting a valuation on a PER basis of 13.7, which looks reasonable to me, even good value once you take into account the strong Bal Sheet with net cash, and the very good dividend yield.

Rising broker forecasts - Stockopedia has a particularly useful little chart buried near the bottom of the StockReport, which shows changes to broker EPS forecast (consensus) in the last year.

I've found that usually a steadily rising line (meaning brokers are repeatedly upgrading forecast earnings) is a very good sign. That has proven to be the case here for Zytronic - chart of broker forecasts shown above right.

Perhaps the reason might be that, after a serious mishap such as happened with the profit warning in May 2013, brokers tend to err on the side of caution for a while - it takes time for companies to rebuild market confidence. This provides an opportunity for investors - small companies often have lumps & bumps in their order books, it's almost inevitable when…

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RicGains

10th Sep '14

If you've ever watched the numbers game on the gameshow Countdown you'll know the moment when Rachel Riley or Carol Vorderman shows you a way of getting to the correct answer. Often a contestant will have done it in a different way though, but still gets 10pts for correctly getting to 659. I'll show you my workings Paul for Zytronic (LON:ZYT) 18p EPS as well, which I did half asleep this morning - you can imagine my delight when the accountancy expert came to the same conclusion as well, just a different way!

I accept all this is guess work, back of the envelope in five minutes, so I've probably missed something, and you can never say, and various other disclaimers.

We know they are 8% up on "the corresponding period last year". So let's call that H2, where they did £8.8m top line last year.

So that's 9.5m. We also know that "significant improvement in margins" have continued "further". They did a 34% gross margin in H1 - up from 26% last year, so let's bump that up to 37% for H2.

9.5 x .37 = £3.5m

Less Admin and Distribution costs of £1.6m (double H1)

£1.9. Stick that onto 1.4 which they achieved in H1 and we're at £3.3m, which is basically the forecast for Sept 15.

At £3.3m for Sept '15 analysts reckoned on 18p EPS.

Obviously it's all guess work, but I thought I'd lay out my fag packet thinking as well, especially as it matches.

Nice yield as well.

Paul Scott

Hi Ric,

I followed most of that. The only query is what the "equivalent period last year" means? i.e. do they just mean H2 to date, or the full year to date? I suspect its the latter, but might clarify that with the company.

UPDATE: The company have just confirmed to me that the "equivalent period last year" refers to the year-to-date to end Aug 2014, compared with the year-to-date to end Aug 2013.

Regards, Paul.

JollyBiologist

That's a really nice start to the day. And thanks, Paul, for first alerting me to the potential in this company. I was particularly impressed by your phone conversation with the company - that, along with DMOR, persuaded me not only to buy, but also to top up when it recently dropped to 200p (instead of selling in a panic which I might have done in the past!). Makes up for some very poor decision making with other shares recently... Thanks again.

Lovely, thanks.

Well I'm sure someone better qualified will correct me, but they only grew revenue by 3.8% in H1. (8.5m H1-13 to 8.8m H1-14)

Now, I fully accept that we don't know how the month of August 2013 was for them - nor what's happening in the next three weeks, but if we were comparing September year ends, we know that 8% is where we're at over all; they did 3.8% in H1, which implies currently 12+% growth in H2.

So, those numbers I gave above can be upgraded.

Lots of assumptions granted, but that's very positive.

Thanks,

Richard

stpalm

Hi Paul, any comment on results for belvoir letting, pretty please :)

FREng

Paul,

You might like to comment on Parity (LON:PTY) 's interim results today. The market seems to like them, but it looks as though it's the recruitment side that is doing well, rather than the digital marketing business that they are trying to become.

Hutch_Pod

Thanks for confirming the 8% basis Paul, which i think means a little tweak upwards (just shy of 19p EPS) based on RicGains back of envelope above - very useful too, and easy to follow the rapid logic :)

Thanks for the review of Parity (LON:PTY). I won't be buying shares either. Philip Swinstead, the group executive chairman, is a veteran of the industry and has a strong track record. He's also got a big enough stake to make him keen to maximise shareholder value. It seems that he's having more difficulty than he expected though. Perhaps the market has changed too much since the days of his greatest successes.

philsportfolio

Nice article on Zytronic. I would however be a bit concerned by the fact that Microsoft are about to start mass producing large touch screens, which should in turn bring the price down. http://www.zdnet.com/microsoft-gears-up-to-mass-produce-large-screen-touch-displays-7000033257/

Hi philsportfolio,

Thanks for the link to the Microsoft product, interesting.

We've touched on competition a number of times when I've met Zytronic, and they stress that their products are bespoke, and in relatively small quantities. So they're not competing with mass manufacturers, who can obviously achieve lower prices. Instead Zytronic design & build a touch screen to the customer's specifications, for a particular model of e.g. ATM, vending machine, etc. Those screens will then be repeat ordered over say 3 years, until the next model is designed & built.

Zytronic also stress their products' technical advantages, especially in harsh outdoor environments, direct sunlight, etc.

The litmus test is profit margin, which will be low in a highly competitive market, but high if a company has competitive advantages. ZYT's operating margin is fairly high at 10-20%, so it looks positive there.

Bear in mind also that the North of England is reasonably low cost for an advanced economy in terms of overheads - plentiful supply of reasonably well educated & not particuarly expensive labour, low rents, etc. So there probably wouldn't be a huge advantage moving production to say Eastern Europe, and they might not be able to get the expertise that they have accumulated in England. Recent fall in sterling will help too.

The most encouraging thing is that the downturn in 2013 is now clearly a blip, with the business resuming its previously good performance. That's being reflected in the shares getting re-rated, although as set out in the main article above, I think there could be more upside - doubt I will be selling below 300p anyway.

Regards, Paul.

danyou

Paul,
Thanks as always for your helpful analyses.
Do you have any thoughts on Thornton's statement today?
Also, do you have any knowledge of when SAL will be updating the market?
Thanks!

ericb

and can you tell me what i should have for breakfast tomorrow Paul - im not sure what to do

Igotts

Just a note about Zytronic competition. Two examples where quality fell by the wayside in the wake of mass production. First: Betamax and Philips's Video tape systems fell to VHS despite being much better systems.
Second: there are lots of handheld terminals which use touchscreens: many of these custom-build units are being replaced by i-phones with custom apps on, eg Harvesters. It's cheaper to buy mass-produced hardware with the operating system already there and just write an app. The barcode guns in Tesco, etc are going that way before long: you've got QR coding on your iphone already and it saves the retailers buying the hardware. So whilst I have some ZYT at present, thanks to you, Paul, I'll be watching them very closely.

Hi lgotts,

As far as I can recall, Zytronic (LON:ZYT) don't really do small touch screens for the devices you mention. I'll dig out some old presentations in my hrrmph "filing system" (i.e. in a heap on the floor!!) , but from memory it's really ATM size screens and above where Zytronic specialise.

So it's a niche business, doing smallish runs of bespoke product. This is reflected in the decent level of operating profit margin.

Regards, Paul.

Fair point, Paul. Looking at their products I would guess their Industrial range is the most likely to succumb to iPads.
Ian

cig

Betamax was not fit for purpose: a film didn't fit on a tape and nobody wanted to buy films where you need 2 tapes box sets for every film, and you need get off the sofa in the middle of your entertainment. Typical motion pictures did fit on one VHS tape. So Betamax was a fail on a show-stopper (literally!) feature of the product (capacity) which wasn't saved by superiority in a less critical area (picture quality). That this is poorly understood is interesting in its own right.

Small Cap Value Report (10 Sep 2014) - ZYT, PTY, ANP, THT

Zytronic (LON:ZYT)

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Paul Scott

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