“It is hard to imagine a much more difficult environment for a manufacturer of touch-sensitive screens than a pandemic and a time when people are shunning contact, but Zytronic’s full-year results offer the latest signs that the company is on the road to recovery,” says AJ Bell investment director Russ Mould. “The Tyneside firm is back in profit, it is returning to the dividend list and it can point to rising order books and profit margins.
“Investors do not appear overly enthused today, as the microcap stock is down in early trading, perhaps due to concerns over supply shortages that could crimp the ongoing recovery in sales and profits, but the shares are still up by more than 40% from their year’s low.
“Moreover, the balance sheet carries no debt and has a cash pile of £9.2 million. That compares to a market cap of £21 million, so investors are effectively paying £12 million for a firm which – in a bad year – still produced £12 million of sales and in its peak has generated £20 million in sales, net income of £4.6 million and a dividend of 22.8p per share. Any hint of a return to anything like those levels over time and the shares will look terribly cheap.
Source: Company accounts. Financial year to September.
“Zytronic’s touch-interactive displays need to be tough as they are used in vending machines, gaming machines, public displays and banks, to name but a few, so they need to be able to deal with some rough handling and potentially bad weather.
“The firm itself is now proving its resilience, helped by a net cash balance sheet, as it looks to bounce back from not just the pandemic but downturns in both the gaming and banking markets, thanks to the regulatory pushback against Fixed Odds Betting Terminals and branch closures and the rise of the cashless society respectively.
“So robust are the company’s finances that the board sanctioned a tender offer earlier this year, as Zytronic bought back £6.7 million of stock, or 29% of its issued shares.
Source: Company accounts. Financial year to September.
“The strong balance sheet means shareholders can be patient, especially as dividends are starting to flow once more. Investors can also look back on prior profit cycles for the company and see that there have always been lumps and bumps – the pandemic has just taken that to new extremes.
Source: Company accounts. Financial year to September.
“Since the firm’s flotation in 2000 annual profits have fallen year-on-year on four individual occasions - 2002, 2007, 2010 and 2013 – before suffering a longer dip from 2018 to 2020.
“Yet when things go well at Zytronic they really can go well.
“The company’s expertise in handling and processing glass, plastics and laminates represents both a key competitive edge and huge barrier to entry to would-be rivals. Zytronic shapes the materials, drills holes in them and then prints on them before making the screen a touch sensor through the deployment of a combination of clever software and electronics.
“Operating margins can exceed 20% when the business is really humming and the factories are moving toward full capacity and the company can point to a run between 2008 and 2017 when net profits exceeded £1 million every time.
Source: Company accounts. Financial year to September.
“It will be interesting to see if the pandemic disrupts what had looked like long-term growth drivers for the business.
“There had been a clear trend toward displays of 30 inches across, or larger, as buyers looked to better engage with their own customers or boost productivity in their own operation.
“This was good news for Zytronic because it meant more capacitive technology components per unit and that boosted profit margins. A trend toward more complex, multi-touch, multi-user sensors and displays was also bringing similar benefits.
“It remains to be seen whether those trends pick up pace in a post-pandemic world and, if so, how quickly, but the outlook statement from chair Tudor Davies that accompanies the results offers grounds for encouragement, especially as sales from gaming, vending and financial customers are rose sharply in the second half of the year just ended.”
