Small Cap Value Report (Thu 16 Feb 2017) - ZYT, TRI, ALY

16th Feb '17 by Paul Scott

36 comments 17946 reads

Good morning!

It's Paul here. I arrived back in the UK at about 4:30 this morning, after a very pleasant overnight flight on an A380, from Hong Kong. I've been looking forward to my first flight on an A380, and really enjoyed it. It was very quiet on the upper deck, with little engine noise, so I managed to sleep for some of the journey. Hence me being sufficiently with-it to be able to do some writing about small caps this morning. Also I limited myself to only 4 glasses of champagne on boarding the plane, which means a fairly clear head today!

Thanks to Graham for holding the fort whilst I was away. It was my first ever trip to the Far East, but definitely won't be my last. I absolutely loved Hong Kong - clean, modern, marvellous service, and full of pleasant, courteous people - what more could you wish for? I'm sure many (probably most) readers here have been there too.

Right, on to today's small cap news.

Zytronic (LON:ZYT)

Share price: 385p (pre market opening)
No. shares: 15.9m
Market cap: £61.2m

(at the time of writing, I hold a long position in this share)

AGM Trading update - a brief update today, saying;

Further to the outlook statement given in December 2016, revenue and trading year to date has continued to be ahead of the equivalent period and remains in line with management's expectations.

That's fine by me - a solid update. Note that broker consensus earnings forecast has been increasing over the last year, which is clearly a positive thing;

Exports/forex - note that Zytronic is a UK manufacturer of bespoke touch screens, which exports 95% of its production. Therefore the devaluation of sterling has been excellent news - in making Zytronic more competitive against overseas competitors.

The benefit has to date been blunted by forex hedging, but we should see gains begin to come through in the current year (ending 30 Sep 2017). This is a very nice tailwind for the share, and should mean a double benefit of increased sales & margins.

Valuation - Zytronic always seems to look cheap. Perhaps that's because there's not really much growth going on? The figures below also don't allow for the fact that ZYT has a terrific balance sheet, with net cash of £11.6m when last reported…

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Cleeve

16th Feb '17

Paul welcome back, I love Hong Kong, they never say no as a city and are very industrious next time try the upper house hotel I used to stay at he mandarin but this the upper house beats it, can get you a great rate if you need it. Can you look at avation for me as on the surface the interim seem good

bestace

I agree that lack of strong top line growth seems to be the issue with Zytronic (LON:ZYT). The narrative of transition from non-touch to touch revenues does have some merit, but even within the supposed growth area of touch screens, growth seems to have slowed over the last year to around 5% compared to 16% the year before. These are the half year breakdowns for the last few years:

There also seems to be transition going on within the touch screen segment from small and medium screens (less than 30") to large screens:

Although large screens have higher margins and higher revenues per unit , sales volumes are also much lower as the chart shows. My concern is that by focusing on the larger screen sizes, there is a greater risk of sales lumpiness with resulting gaps opening in the order book like happened in 2013.

This is compounded by the fact they are pretty dependent on a few core customers - in the risks section of the 2016 annual report they mention 'reliance on key customers', where they disclose that 'the Group has 61% of its revenue from three key customers'. This is the first time this risk has appeared in their annual reports and is the only risk listed which they classify as 'major'.

I continue to hold, but am watching the top line figures closely. It would have been helpful to know what the 'management expectations' are that they refer to in today's RNS.

TamzinPiworld

Paul, welcome back!

If you, or any of your readers would like to see Creightons (LON:CRL), Idox (LON:IDOX) or Cohort (LON:CHRT) present, next Tuesday 21st February, 2.30pm, please join us!

We've arranged an hour's presentation by each in London, WC2.

They're interesting companies, so I hope you and your readers, don't mind me flagging here!

Creightons (LON:CRL) first came on my radar at Mello, and are up over 100% since.

Idox (LON:IDOX) has had a change of CEO, so this is an opportunity to hear the new CEO, Andrew Riley, and his thoughts going forward. Forecasts seem to be on the upgrade.

Cohort (LON:CHRT) have benefited from fx, and may give a sense of MoD spending plans, which might help them. And an update on each of the divisions.

(Contact: Tamzin piworld.co.uk)

simoan

Hi Paul,

Hong Kong is great but I wouldn't swap it for Tokyo! My favourite city by a wide margin :)

On jet lag... I basically never sleep on the plane when travelling East; only when travelling West. Travelling East because time "compresses" I just treat it as a long day. Travelling West I always try to sleep and book flights that arrive early morning at the destination. It works well for me and I hardly get jet lag but realise everyone is different. Of course, if you had a hard night on the town before the flight it may not be possible to go without sleep :)

For me Laura Ashley Holdings (LON:ALY) is uninvestable because the management don't seem to give a damn about other shareholders. The reports are terse in the extreme and they don't seem to bother with trading updates between results. The dividend cut was evident from the last announcement so I'm not sure anyone could claim they never saw it coming although true to form there was no guidance on dividend policy by the management. Hopeless! I'm surprised you held as long as you did. You paint the idea of a management buyout as maybe a good thing but the dominant shareholder can practically name his price so any holders expecting any kind of premium to the prevailing market price are being extremely naive IMHO.

All the best, Si

Tortoise investor

The other threat to Laura Ashley Holdings (LON:ALY) in the UK is from more fleet-a-foot primarily online players like Made, Sofa, and Loaf (such a shame they are not listed!). Their styles are much more modern whereas Laura Ashley only seems to cater for 'Country House' style. I remain unconvinced about its international growth prospects: it has been saying for years that it is excited by Asian growth prospects yet nothing ever materialises. I think it's a value-trap.

bobo

TRI, the good thing about this company from a customer point of view is that they are very good at what they do, probably the best world wide. The Problem they have is their competitors are only just slightly not as good. So differentiation is tough to achieve and hold. I see no real growth opportunity in the business, just more of the same old.

ALY; well after the Singapore office buy I don't trust the board. So not one for me. The Brand is good but the assets are just too dodgy, what happens if they decide to buy something else unconnected.

Mark Carter

As one poster commented on another bulletin board about Laura Ashley Holdings (LON:ALY) :

All been downhill since that dodgy unnecessary property transaction in Singapore - couldn't trust them after that. Stopped me from buying in.

Sums it up, really.

RMundy

Welcome back Paul. And I don't believe the "just 4 glasses of champagne" for a moment!

daveinthelakes

Hi Paul,
Not pure video conferencing but methinks the tech may be moving ahead of LoopUp judging by today's release from IBM-

"The Intelligent Workplace Solution leverages IBM Watson IoT and Ricoh's easy-to-use interactive whiteboards to change the way teams meet and collaborate through new intuitive features that can be accessed using natural voice. It makes sure that Watson doesn't just listen, but is an active meeting participant, using real-time analytics to help guide discussions so teams can make faster, better and more informed decisions.

Most companies find that the majority of information shared and discussed during meetings may be lost or forgotten. Ricoh is incorporating this new powerful, innovative solution into its broader set of service offerings to help customers continually improve meeting collaboration and productivity. Likewise, IBM sees a range of more complex smart meeting support functions in the future, thanks to Watson's learning capabilities"

Regards, Dave.

ACounsell

Hi Paul,

Could I echo Trident's question about situation at Tracsis (LON:TRCS). Graham did a useful review yesterday which suggested that things looked a bit 'iffy'! but given your previous contacts with the company's management team do you have anything you could add. The share is down 30%+ since the start of of the year (most of it in last two days) and if I was following the Stockopedia publication 'Proft Warning Survival Guide' then I should have sold my holding immediately! This would seem to be the view of the market with the share price hit very hard but I am hanging on at the moment as unlike the 'Profit Survival Guide' data it seems every share I sell on a profit warning/stop loss (20-30%) comes back and moves well ahead of my sale price (Avon Rubber (LON:AVON), Staffline (LON:STAF), SCISYS (LON:SSY), iomart (LON:IOM), Entertainment One (LON:ETO) to name a few) within a few months!

janebolacha

Are Laura Ashley Holdings (LON:ALY) actually even using much of the Singapore property?

I ask that because there seem to be property listings to rent out space in that building:

http://www.kennieyau.com/20151667

It is quite likely they could simply have rented themselves last year the exact space they needed for their own business, rather than buying in a toppy market there.

WDWombat

I listened to a ZYT interview a couple of years ago but never bought though I thought it sounded pretty good and as you rightly say at worst the finances appear more than solid. However I was just wondering whether there might be an impact from the tightening regulations about to hit betting shop machines?

Trident

ACounsell

Very difficult in such an illiquid share as Tracsis to sell shares and not absolutely clatter the price. It seems to be plunging towards a more average market multiple form the high it had. There hasn't actually been a profit warning but the market has treated it as if it has. As Graham indicated, it has used slightly more tentative language about sales in the second half, but has broadly said the second half will be stronger than the first.
I suspect one division has materially underperformed, but the business acquired last year, which is pretty profitable, has filled the hole left and so overall it is slightly up against the prior year.
But it would be nice to hear from the CEO. It's always easy to do PR when the market and business performance is with you!

peterthegreat

I agree with Paul's opinion on the quality of Zytronic but one of the reasons I bought it several years ago was its conservative management and non-aggressive approach to growth so I am happy to see the company's "steady-as-she-goes" strategy which I believe over the long term will benefit me without incurring too much risk.

Fangorn

Hong Kong is a superb place indeed Paul.So much to see, so little time.

Lived there for 10 years in late nineties/noughties. Visits these days always coincide with the last weekend of March/or more recently the 1st weekend of April. Those in the know will understand why..

Honkers has changed considerably, It's gone full circle expat entertainment wise over last couple of years with Soho/Bars off Escalator gaining in popularity once again(as it was in mid to late 90's when I first moved out there.)

So much construction going on since I left in 2008 however and favourite restaurants ion California tower since closed. Indochine, and Thai Lemon grass.

Hong Kong will always be a home away from home.

If you're intent on venturing out to Asia again...Tokyo is a must. As is Singapore/Malaysia(part of the Orient Express was still in operation in early noughties)

and then you have Cambodia, Vietnam, Korea, Thailand...and Bali is but a short hop too.

That's before Australia, NZ, and Mainland China..Shanghai is quite amazing...

Europe is insignifcant by comparison. Asia is the future. very fond memories of decade out there.

p.s Vis Mandarin hotel, has to be the old one, with the Captain's bar - New Mandarin a tad pretentious, and frankly, naff.

I hope you did Tea at the Peninsula, or Champers at the Felix bar atop the Peninsula in TST

Wildrides

"Only four glasses of champers on the fight home" ...........good grief man ........I would be on the floor giggling like a three year old girl . Goes right to my head that stuff .

gbengus50

Welcome back Paul,thanks for the update.I recently bought ZYT for the dividend yield as would be watching how it goes.

back2value

17th Feb '17

Paul, if you think Hong Kong's full of pleasant, courteous people, wait until you have the chance to visit Japan.

We can guide you.

B2V

andyhorton

Hi Paul
Couldn't agree more with ALY - I held on for 15 months after buying and suffering an immediate drop in the share price. Two reasonable divi payouts were the only consolation.
Also is there any truth in the rumour that Amazon have brought out a similar product to Loopup's? Can't understand the masssive drop back............
Best wishes, Andy.

Are Laura Ashley Holdings (LON:ALY) actually even using much of the Singapore property?Jane,

Jane,

I think you're missing the point... Laura Ashley Holdings (LON:ALY) is a property company with a sideline in chintz :). Of course, we also need to mention the ridiculous hotels in this regard. Anybody would think this company is a vanity project for a very rich man who throws other shareholders a few crumbs every 6 months, but only because he has to... or have I got something wrong?

Small Cap Value Report (Thu 16 Feb 2017) - ZYT, TRI, ALY

Zytronic (LON:ZYT)

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Paul Scott

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