Small Cap Value Report (Thu 2 May 2019) - BOTB, ZYT

Good morning, it's Paul here.

BOTB

Trading update

(I have a long position in this share)

Best of the Best PLC, (LSE: BOTB) the organiser of weekly competitions to win dream cars and other luxury prizes, is pleased to announce the following trading update for the 12 months ended 30 April 2019 (the "Period").

Good news!

The Company's financial performance during the Period has continued to be strong, with the impact of the Company's online strategy and focused marketing efforts becoming increasingly evident.

As a result, the Board expects to report full year profit ahead of market expectations and revenue marginally ahead of market expectations.

This share is very illiquid, but it's a nice little company in my view.

The flow of divis, both normal, and special, have been excellent, in recent years.

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Zytronic (LON:ZYT)

Share price: 262.5p (down 24.5% today, at 14:39)
No. shares: 16.0m
Market cap: £42.0m

Trading update (profit warning)

Zytronic is a UK manufacturer of bespoke touch-sensor screens.

Today it updates us on trading in H1 of FY 09/2019.

Revenue is down 10% & profit down 36% on last year's H1;

... interim results for the first half, which are due to be announced on 14 May 2019 and are expected to show revenues of £9.5m (2018 H1: £10.6m) and profit before tax of £1.4m (2018 H1: £2.2m)...

The last update was on 11 Dec 2018, which I reviewed here - being 09/2018 results, and associated trading update. Interestingly, I noted then the lumpy nature of orders, customer concentration, and the ever-present risk of a profit warning. Although the very strong, cash-rich balance sheet, and record of generous divis cushions that factor somewhat.

Performance has deteriorated since Dec 2018, when the company said that current trading was at "similar levels as last year" (Dec 2018), but is now well below last year (Mar 2019).

What's gone wrong? Order delays in the gaming sector;

Despite there still being an encouraging pipeline of opportunities in Gaming, the pace of conversion to orders in the year to date has been much slower than the Board had anticipated. 

H2 outlook - doesn't sound great to me;

Although trading in the second half of the financial year is usually stronger than the first half, Zytronic is cautious on the level and timing of recovery of sales in the Gaming sector and therefore on the expected performance for the second half.

It sounds as if there could be more pain to come in H2, hence I'm trying to resist the urge to catch the falling knife. It sounds like a situation that might be best to watch from a safe distance, for now.

The company has alluded before to some potential big deal(s) in the pipeline, which are mentioned again today;

Zytronic remains in a position of having several opportunities with the potential to materially improve future performance.

Cash position - remains very strong;

The Company continues to be cash generative and is in a strong financial position, with net cash of £12.1m as at 31 March 2019....

Checking the last results, it reported £14.6m net cash at 30 Sep 2018. So the cash pile actually seems to have fallen by £2.5m in 6 months, which does not sit squarely with the comment that the business is cash generative. Perhaps there was some unusual working capital movement that distorted the 31 Mar 2019 cash figure downwards? I've just sent an email to the company, querying this point & will report back to you.

EDIT: the company has responded to my query re the reduced cash pile. giving the reason as;

In the main the 2018 final dividend payment, paid out during February of £2.5m

(end of edit)

Dividends - the company has a history of continuing to pay out generous divis, even after previous setbacks. That's a key advantage of having a balance sheet stuffed full of surplus cash.

Today it says;

The Board anticipates maintaining the interim dividend at a similar level to that paid in the previous year.

That's nuanced because it only mentions the interim divi, not the full year divi.

Note that broker forecast is for an increase in the full year divis from 22.8p last year, to 25.1p this year.

It paid 7.6p interim divi last year, so that looks fairly safe for this year. The larger 15.2p final divi last year could well be cut this year.

The house broker forecasts today a full year divi of 22.8p (flat vs last year), which would give a yield of 8.7%

Forecasts - there's a useful update note from the house broker, available on Research Tree. They've taken an axe to FY 09/2019 and 09/2020 forecasts, down 33% and 28% respectively. Adjusted EPS is now;

FY 09/2019:  17.0p - PER of 15.4

FY 09/2020:  18.7p - PER of 14.0  (reduces to a PER of 10, if the net cash pile is adjusted out)

Bear in mind that the share price currently of 262.5p includes the cash pile of £12.1m. If we deduct that, then the enterprise value is 187p per share - giving a much lower PER, once cash is adjusted out.

Given the company's poor current performance, that valuation looks about right to me.

My opinion - it's tempting to buy some for the divis, and the cash pile.

Business is inherently lumpy, that's unavoidable due to the size of company, and its customer concentration. Therefore, you could see the occasional profit warning as a good buying opportunity.

Last time there was a big profit warning, in 2013, it did recover well, although it took quite a while - I recall sentiment being very negative towards the company for at least 6 months afterwards.

Overall, I'd say this share is coming into range for me. So it's going on my watchlist. If there was another big leg down, I'd probably buy some, but don't see any particular rush - given the wobbly-sounding outlook for H2.

On the upside, if the company lands a big contract mentioned in the pipeline comments, then who knows, there could be a positive surprise at some point? As outside investors, we don't really know what's likely to happen, that's the trouble.