If you've hired a 'Boris bike' lately, played a hand of Texas Hold'em on a new generation fruit machine, or bought a can of Coca-Cola from one of its Freestyle vending machines, the chances are you've come into contact - quite literally - with one of Zytronic's (ZYT) touchscreens. Touchscreens are becoming more and more ubiquitous, which is a long-term trend benefiting Zytronic. But sales setbacks last year means shares in the Newcastle-based electronics company can now be bought on a rating well below the historic average, despite signs that a recovery is already setting in, and there is a handsome yield on offer, too.
- Touchscreen applications becoming wider and more sophisticated
- Reduction in cost base
- Cash-rich balance sheet
- Fat dividend yield
- Short order book
- 'High probability' deals may not come through
Exports account for 95 per cent of Zytronic's sales and products range from super-tough touchscreens used in coal mines run by mining giant BHP Billiton through to massive 85-inch screens that can be used simultaneously by two people or more - think, for example, of playing table football on a touchscreen.
So - like the screens themselves - touchscreen applications are becoming wider as the screens become more sophisticated. That should be good news for Zytronic because it implies extra pricing power. However, the nature of all electronic technologies is that products quickly get commoditised and even suppliers well up the value chain feel the pressure.
Nor does it help that Zytronic's order book is short, so revenue growth can quickly turn into a revenue shortfall. That happened in the first half of 2012-13 when the absence of one-off sales that helped the previous first half plus 10,000 fewer sensors sold for Coca-Cola's Freestyle vending machines meant turnover dropped 20 per cent and pre-tax profits were scythed by two-thirds to £0.78m. Cost-cutting plus more sales of higher value-added screens in the second half meant some lost ground was recouped. Even so, Zytronic finished the year with sales down 15 per cent to £17.3m and underlying pre-tax profits 44 per cent lower at £2.4m.
Meanwhile, the warning that preceded the poor first-half results bashed the share price. True, it is now 40 per cent above its 12-month low, but it remains equally far below the 12-month high and at a level that makes Zytronic's shares a buy both for recovery and for the forecast 4.7 per cent 2014 dividend yield, underpinned by a cash-rich balance sheet (see table).
| Zytronic (ZYT) | ||||
|---|---|---|---|---|
| ORD PRICE: | 199p | MARKET VALUE: | £29.9m | |
| TOUCH: | 198-200p | 12-MONTH HIGH: | 345p | LOW: 144p |
| FWD DIVIDEND YIELD: | 5.0% | FWD PE RATIO: | 14 | |
| NET ASSET VALUE: | 107p | NET CASH: | £3.7m | |
| Year to 30 Sep | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 20.5 | 3.60 | 18.1 | 7.7 |
| 2012 | 20.4 | 4.20 | 21.9 | 8.5 |
| 2013 | 17.3 | 2.35 | 13.8 | 9.1 |
| 2014* | 18.0 | 2.50 | 13.3 | 9.5 |
| 2015* | 18.8 | 2.70 | 14.7 | 10.0 |
| % change | +4 | +8 | +11 | +5 |
Normal market size: 1,000 Market makers: 4 Beta: 0.63 *N+1 Singer estimates, underlying PTP and EPS figures | ||||
As to the likelihood of that recovery, signs from last year's second half are encouraging. The effect of cost-cutting and shift in the sales mix meant the underlying gross profit margin was 35.4 per cent, almost back to 2011-12's level. Chairman Tudor Davies says this trend has continued into the first two months of 2013-14 and broker N+1 Singer, which is Zytronic's financial adviser, has nudged up its forecast for the current year, though it does not assume that the early-stage improvements will last the full 12 months.
Longer term, and more important, is the growth in Zytronic's sales opportunities. For example, in 'signage' displays - where the company sells big screens with commensurately wide margins - the number of projects with a "high probability of success" doubled to 16 in the last year's second half. Similarly, in gaming, where the screens are getting more sophisticated, 'high-probability' projects rose from two to five, and that included two new customers.
