Small Cap Value Report (Thu 22 Feb 2018) - ZYT, D4T4, XPD, MACF, BKS

Wednesday, Feb 21 2018 by

Hi, it's Paul here.

I'm running a bit late today, due to a Doctor's appointment (nothing serious), so will be updating this article all afternoon & evening. Please see the header for the announcements that I shall be writing about, plus one or two reader requests.

Update: lots of requests today! I've added the ones that look most interesting into the article header, and will work my way through them this afternoon.

Zytronic (LON:ZYT)

Share price: 490p (down 8.1% today, at 12:42)
No. shares: 16.04m
Market cap: £78.6m

AGM trading update

Zytronic is a world-renowned developer and manufacturer of a unique range of internationally award winning optically transparent interactive touch sensor overlay products for use with electronic displays in industrial, self-service and public access equipment.

The current financial year will end on 30 Sep 2018.

This is what it says about trading in the 4 months to end Jan 2018;

Further to the outlook statement given in the preliminary results announcement, current revenues and profits over the first four months of this financial year remain broadly in line with the equivalent period last year.

[published today, 22 Feb 2018]

Checking back, this is what the company said on 12 Dec 2017, in the outlook section of its preliminary results;

The current year has started with orders, revenues and trading along similar levels to that of the prior year, which, together with our strong balance sheet and cash generation, provides a sound base for further growth in dividends and shareholder value. The focus on growth this year will be from expansion in local sales representation in the USA and the Far East, and we shall keep shareholders updated on the progress, and any material developments, over the course of the year.

[published on 12 Dec 2017]

Those two statements essentially say the same thing - trading is flat, or slightly below last year. This is reflected in a share price that is about the same, comparing those two dates.


Valuation - last year normalised EPS was 28.7p, and the StockReport is showing broker consensus of 29.9p for this year. So it sounds as if forecasts might need to be edged down a little, given that the company is struggling…

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Zytronic plc is involved in developing and manufacturing of touch sensor products. The Company is also engaged in the development and manufacture of customized optical filters. Its geographical segments include Americas (excluding USA), USA, EMEA (excluding UK and Hungary), Hungary, UK, APAC (excluding South Korea) and South Korea. Its products incorporate an embedded array of metallic micro-sensing electrodes. Its technologies include projected capacitive technology (PCT) and multi-touch mutual projected capacitive technology (MPCT). PCT touch sensors can be constructed from one, two or three layers of laminated, toughened glass. Its sensing products offer touchscreen solution for applications, such as leisure, digital signage, retail, surfaces, banking and industrial applications. Its touch sensors are used in video jukeboxes and slot machines. The PCT touch sensors are used in a range of workplace applications, from medical diagnostic equipment to oil field machinery controls. more »

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D4t4 Solutions Plc, formerly IS Solutions Plc, is a United Kingdom-based company, which focuses on data solutions for its clients to provide end-to-end management of the entire data lifecycle, from its initial creation through the manipulation, analysis and management of the data all the way through to its eventual retirement into industry-compliant archives. Its segments include License sales, Project work and Recurring revenues. Its market focus areas include Data Collection, which captures data from any digital channel through its division, Celebrus Technologies; Data Management, which includes the secure storage and management of all forms of data, either in the cloud or on client premises, for presentation through multiple devices and applications; Data Analysis, which focuses on delivering value through analytics capabilities, and Data Solutions, which includes areas, such as Web and mobile application development, systems migrations and upgrades, and Software-as-a-Service. more »

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Xpediator PLC is a United Kingdom-based provider of freight management services. The Company operates in the supply chain logistics and fulfillment sector across the United Kingdom and Europe. It operated through three main business areas: Freight forwarding, Logistics and warehousing and pallet distribution services, and transport services. It does its freight forwarding and logistics business under the brand name Delamode. It operates its transport services business under the Affinity brand. Delamode acts as a broker and collects and consolidates freight on behalf of its customers. Its EshopWedrop is a business to customer delivery service, which enables consumers to make online purchases. Its logistics and warehouse activities comprise three core businesses: Delamode Logistics UK, Delamode Logistics Romania, and Pall-Ex Romania. Affinity offers a comprehensive range of services that support the activities of transport companies throughout central and eastern European countries. more »

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  Is LON:ZYT fundamentally strong or weak? Find out More »

70 Comments on this Article show/hide all

Edinburgh Investor 22nd Feb '18 51 of 70

Market responding well to Vitec (LON:VTC) results today. Anyone got any thoughts on this small cap. Have it on my watch list but have not dug into it too deeply yet.

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mrosbiston 22nd Feb '18 52 of 70

would be more convinced of an entry in GAME Digital (LON:GMD) around 25p or better at 20p. Would want to see evidence of a turnaround in trend - this could happen with half year results at the end of March

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simoan 22nd Feb '18 53 of 70

In reply to post #329118

I'm just leaving the proceeds in cash for now, I'm not really in a hurry to recycle the money into something else.

Fair enough. I just wondered whether you had anything else in mind because I'm struggling to find much of interest currently that I don't already hold. I just took another small bite of H & T (LON:HAT) at 330p with some of my proceeds from Zytronic but otherwise have cash burning a hole in my pocket. As with Zytronic (LON:ZYT) this morning, I have a great problem completely selling out of fundamentally sound companies when I have more cash than I would like.

There's no reference to management expectations in today's announcement, from which I think it can be inferred that not only is growth flat this year, the drop off is also below management expectations.

This is the problem though, isn't it? We're having to read between the lines and infer all kinds of things from this RNS that only covers 4 months. They really are rubbish at shareholder communication, they clearly put zero effort into it, so I can't really see the point of people wasting shoe leather going to the AGM today - hopefully they'll get a nice biscuit although it'll probably end up being a stale Rich Tea with a lukewarm cuppa from a vending machine! As you can tell, I'm not dreadfully impressed by the Zytronic management.

All the best, Si

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Wimbledonsprinter 22nd Feb '18 54 of 70

In reply to post #329023


I totally agree with you about the cash at GAME Digital (LON:GMD) - the fact the management stopped the dividend after the June interim payment indicates they agree too.

As a minor factor, recent weakness maybe due to the surprise £100 million buy-back announcement by Sports Direct on Tuesday. This presumably reduces the chances of it topping up it stakes in Game, or French Connection (LON:FCCN) (also a touch weak recently) and maybe also Debenhams (LON:DEB) (although that has performed well the last few days).

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Beginner 22nd Feb '18 55 of 70

In reply to post #328993

Lots of logic there nicobos, but I will remain sceptical. Wincanton (LON:WIN) were nearly destroyed by meddling in Europe. I still believe the only good things to come out of Benfleet have fins and scales!

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bestace 22nd Feb '18 56 of 70

In reply to post #329058

I doubt you'll find anyone who is advocating for unsustainable dividends!

I think you might have had a point if the cash pile was a lot smaller than it actually is. This is how the cash has grown over the last 6 years, compared to profits (figures from the Stockopedia company pages):


Paul pointed out in his report how the company had a duff year in 2013, and that's clear from looking at the blue bars in the chart, but note how even in that year the cash pile increased.

So to my mind it is questionable whether the cash is even needed as a rainy day fund, certainly not all £14.1m of it. The company has not engaged in M&A activity in the past, appears to have no interest in doing so in the future, nor does it appear to have opportunities to reinvest the cash back into the business at high returns on capital.

The way I see it, the cash belongs to the shareholders and if the Zytronic (LON:ZYT) directors can't find a good use for it (as appears to be the case), then I'm sure their shareholders certainly can.

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dscollard 22nd Feb '18 57 of 70

sold out of Zytronic (LON:ZYT) in Sep when it hit my target: been watching it though as price was staging ar ecovery from the downtrend: however, it only peeked above the 200DMA yesterday and has now resoundingly rejected that. It is a good ol indicator of confidence the 200.

worth noting the geographical spread of Zytronic (LON:ZYT) 's revenues: earnings may meet expectations but GBP is appreciating relative to post Brexit lows: I assume they are quoting constant currency? If not then earnings may let a GBP appreciation headwind. Back on the watchlist, I'd fancy a bit below 440p .


Good but expected news from £D4T4, it adds to a recent spate of positive news: I bought a few bucket loads after the dip on earnings last November. The director dealings following their commitments on closing sales in their pipeline added to confidence which now seems to be playing out. If sentiment changes then the broker forecasts of 200p might become more achievable. I am bullish on their technology and capability so I'll ride the waves on this one, less of a trade and more of a conviction for me (and a violation of my 200 rule - though this was a reversal play which didn't move towards the stops and was resilient in the recent sell-off with positive RSI)

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mercury61 22nd Feb '18 58 of 70

Interesting news coming out regarding £FLYB

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kenobi 22nd Feb '18 59 of 70

In reply to post #329113

Just as an aside here, I'm not in game, having missed that, but I had from the sidelines thought that the idea was to merge the sporty stuff of SD with video games. I think this has awesome potential longer term. Some games are really adictive but going to the gym is really boring, what better way of getting fit than playing gta or whatever floats your boat with a physical element and skill ? However it seems that wasn't the idea at all, I still think that potential exists whether it happens through the SD link or not.


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Gromley 22nd Feb '18 60 of 70

In reply to post #329093

It's certainly pertinent to point to the share sales by Elliot Capital (Duodi) as that must be a factor in the current price movements, but I'm not sure one can read them as a verdict on the Game collaboration.

The started selling on the 15th Jan nearly a month before the deal was announced. If the sell off is in anyway linked to the collaboration that would be such a clear example of insider trading as to be unthinkable, surely.

Just for background, Elliott brought GMD to market in 2014 and retained 61% ownership at the IPO, reducing to 43% via a placing a few months later. So you'd think they must have had some form of exit plan albeit at a much lower price than the 200p/share they achieved in the IPO and 260p in the follow up placing.

There was a bit of a storm three years ago when they sold some shares in advance of a profit warning

At the time a spokesperson for the company said

““The robust information barriers that Elliott had in place meant that neither Elliott nor its representatives on the board of Game had any knowledge about the trading performance of Game, apart from information already in the public domain, during the period over Christmas and New Year when it sold shares in the company.”

So one would have to presume that they can demonstrate that their selling is not linked to the Sports Direct Deal.

Or am I just being too trusting????

Elliott are said to be in advanced discussions to buy Waterstones, so perhaps the GAME Digital (LON:GMD) sell off just reflects moving on to next big thing?

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peterthegreat 22nd Feb '18 61 of 70

As a long term holder of Zytronic I certainly agree with Pauls' analysis and I find the large amount of cash held by the company to be very sensible. The financial characteristics of this company (apart from the exposure to a limited number of customers) remain strong and attractive so I find it an easy decision to remain a holder.

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gsbmba99 22nd Feb '18 62 of 70

In reply to post #328978

I have a holding in Arcontech (LON:ARC)

Would echo your sensible points. I'm intrigued by the potential of their new desktop product. If it's able to gain some traction, it could eventually appeal to a wider audience than just global investment banks. That could bring a welcome reduction in customer concentration which is extreme at the moment.

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Kiewit 22nd Feb '18 63 of 70

In reply to post #329018

Thanks for your comments. I agree with you and in fact I intend to hold too. I was surprised why the market went off to punish this stock. I agree with you with regards to the management too. For quite a while they have been done quite a good job in maximising efficiency, controlling costs and building the business. 

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jules2k6 22nd Feb '18 64 of 70

Xpediator (LON:XPD) Thanks Paul. There is a recording on the Sharesmag website from 19th October 2017

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seadoc 22nd Feb '18 65 of 70


Macfarlane (LON:MACF) Took me a whole day to get half way where you are so thanks. Also I hold Norcros (LON:NXR) I had not "compared and contrasted" before but see your point. Next... find other pension deficits.. I hold Avon Rubber (LON:AVON) fully priced despite deficit, 600 (LON:SIXH) the same. Surely some old legacy state companies must be in the loop? Perhaps £BT.A but that might also be a play on the copper they have in ground (I no longer hold) or one I hold a tiny position National Grid (LON:NG.)

Anyone got a small cap screen for improving pension deficits?



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abtan 23rd Feb '18 66 of 70

In reply to post #329023

GAME Digital (LON:GMD)

Very insightful post, thanks for sharing!

I have some of my own thoughts, which are probably biased given that I am a holder, but here goes.


For the sake of argument I'm going to assume that:

  1. all cash currently on the balance sheet is used for working capital, and 
  2. that the retail side of the business operates at breaks even

Last financial year 39 store leases were renegotiated for annualised cost savings of £1.4m. 

In the next 18 months, 221 store leases are up for negotiation.  A very rough estimate, but that would equate to annualised rental savings of £7-8m

Contribution from Belong stores is c.£100k (with c.12 month payback periods). Even with 50% profit share agreement in place GAME Digital (LON:GMD) would be looking at £5m annualised contribution once they hit 100 stores (100 stores x £100k per store * 50% profit share). 

I originally expected 100 stores to take about 3 years, but maybe things might accelerate with Sports Direct on board?

The 2 bolded figures above already provide enough support to justify the current market cap (£57m) in my opinion.


Leaving the above assumption aside for a moment I actually think a lot of the current cash balance is required for peak trading periods. The rationale is as follows:

  1. The Spain/UK retail stores split is currently about 50/50
  2. The last GAME Digital (LON:GMD) annual report states that:
    1. "UK facilities [of £50m] yet to be drawn," and  
    2. the Spain facilities are c.40.6m EUR (c£35m) and appear to be fully utilised. 
  3. Assuming that the UK retail stores require a similar amount of cash during peak periods, then Game needs £70m cash at peak periods, roughly about what the company has now (including the recent Multiplay sale). In all likelihood the company probably requires less than £70m, given that the UK facility has remained unused and Multiplay was only recently sold.

Experience has taught me to never like debt, however, I'm comfortable with the above as the business is currently cash generative and I want any additional cash to be re-invested into the Belong stores (which is what is happening).


To take things one step further, if we assume that GAME Digital (LON:GMD) were to liquidate post peak trading, then (using July 2017 Y/E figures) after clearing all liabilities the company would have surplus cash of c.£60m. This should, in my opinion, maintain a floor for the share price of c.30p. 

Also bear in mind that OCF was positive in both the last years (it was £7.7m in 2016/17) so things would have to go really wrong for this to turn negative.


As for the deal with Sports Direct, I don't know why GAME Digital (LON:GMD) would sign up to it if it was a bad deal. If the terms were bad they could (easily?) have walked away and continued as they were. As pointed out above they had/have plenty of cash and unused facilities open to them.

The only thing I was skeptical of was how much in-store rent Sports Direct will charge GAME Digital (LON:GMD). Presumably this will be low but what's to stop SP jacking this up if things take off and they want more than 50% of the bottom line?

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matylda 23rd Feb '18 67 of 70

In reply to post #329288

Thanks for that Xpediator (LON:XPD) video - well worth a watch.

Blog: Briefed Up
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gus 1065 23rd Feb '18 68 of 70

In reply to post #329298

Hi Seadoc.

Not sure if this is what you had in mind, but a quick and dirty screen that identifies small cap companies (less than £500m) with gearing of more than 20% and gearing including including pension deficit of more than 50% where the ratio of gearing including pension deficit raises the overall gearing by more than 1.5x. Easy enough to change any of the variables to get a different mix. Current settings find 27 companies including Macfarlane (LON:MACF) and Norcros (LON:NXR) .

I have previously had a short spread bet open on Devro (LON:DVO) from this screen on concerns about very high, some of it hidden, leverage.


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mrosbiston 23rd Feb '18 69 of 70

In reply to post #329338

nice screen

from this - a bit of manual work shows the following having declining pension deficits
Caffyns (LON:CFYN) ; Chamberlin (LON:CMH) ; Macfarlane (LON:MACF) ; RM (LON:RM.)

only 4 out of the 27

of the names that have the biggest increases in pension deficit y/y

Carclo (LON:CAR) ; Devro (LON:DVO) ; £HVE

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seadoc 23rd Feb '18 70 of 70

In reply to post #329338


Many thanks, sold out of Devro (LON:DVO) a little time ago but for under a pound a day it is amazing what you can dig out of Stocko is it not?



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 Are LON:ZYT's fundamentals sound as an investment? Find out More »

About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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