Zytronic – I sense this is a lot better than it looks

If you are prepared to take a view on its eventual recovery, now could well be the right time to tuck away Zytronic, writes Mark Watson-Mitchell.

Just think about it – we live in a world that is interactive and responsive to our touch. 

Using a touchscreen is now almost second nature and enhances every aspect of our lives at work, rest or play.

That may well be so, but Last Friday’s trading update from Zytronic (LON:ZYT), a leading specialist manufacturer of touch sensors, was not too encouraging.

However, if you are prepared to take a view on its eventual recovery, then now could well be the right time to just tuck a few shares away.

Unique patented award-winning technology

For over 30 years, Zytronic has operated in the optical glass laminating industry, having largely been involved in the manufacture of optical and radio frequency interference and electromagnetic interference filters for use with electronic displays.

The Newcastle-based group is a developer and manufacturer of unique optically transparent interactive touch sensor overlay products for use with electronic displays in industrial, self-service and public access equipment.

Disappointing 2020 finals

In the second week of December last the group announced its results for the year to end-September – they were not good.

Showing the devastation that Covid-19 has had on this tiny company, it reported turnover down from £20.1m to £12.7m and a slashing of its gross margins from 33.7% to just 20.1%. It came in with a loss of £0.4m (£3.1m profit), with the loss per share of 1.8p compared to the previous earnings of 16.8p.

Am I selling this well?

Probably not.

However, this little £19.6m capitalised group has a very useful £14m net cash in the bank, with net assets totalling £23m. 

Let me tell you more.

This internationally award-winning group’s capacity touch products employ a sensing solution that is readily configurable and is embedded in a laminate core. It offers significant durability, environmental stability and optical enhancement benefits to system designers’ specific requirements.

Its technology will detect multiple user touches through thick surfaces and even through a glove. They can operate in the harshest of environments imaginable, ignoring the effects of raindrops, leaves, dirt or ice – making its systems ideal for both indoor and outdoor use.

Unlike conventional capacitive, acoustic and optical touch sensors, the active component of projected capacitive touch technology is embedded behind the front substrate, ensuring protection, long life, and stability. 

Multiple uses in a global marketplace

Some 96% of group sales are exported either directly or through global sales channel partners.

Its single touch or multi-touch technology is used by clients and their customers in a variety of leisure applications, ranging from video jukeboxes to the latest slot machines.

It is used in signage for advertising, in medical diagnostics, even oil field machinery controls. It is heavily used in the retail sector and, of course, in banking ATMs, also in a multitude of other uses. 

Gaming made up 25% of last year’s sales, financial 30%, vending 17%, industrial 13% and signage 9%, with other sectors taking up the balance.

It is unique in the touch eco-system 

At its single site the company has three factories with a total of 80,000 sq.ft. In ‘state of the art’ environmentally controlled cleanrooms, it processes the form and factor of the glass substrates, then according to customer requirements it assembles their touch overlay. 

The company, by developing bespoke firmware, software and electronic hardware, then links the interactive overlays specific to its customer’s integrated systems and products.

In non-Covid-19 times its margins are incredible

This little company can be quite profitable when times are better. It has previously reported a £5.4m pre-tax profit on just £23m of sales revenue, generating 29p per share in earnings and paying out a 14.7p dividend. 

Subsequent to Covid-19, it quickly put in place various cost-saving measures. However, in the first quarter of the current year it has probably scored only £2m of sales. I cannot believe that it will only do £8m this year.

Good professional holders but poor management stake

The group has 16.04m shares in issue. 

The larger shareholders include Hargreaves Lansdown (11.21%), Interactive Investor Trading (8.70%), Close Brothers (7.96%), AXA SA (7.57%), Canaccord Genuity (4.44%), Barclays Bank (4.27%), and Brewin Dolphin Holdings (3.01%).

Disappointingly Directors and related parties only hold a miniscule 1.52% of the equity.

AGM within a month

The group’s AGM is due to be held on Thursday 25 February, when, hopefully, we could well get a further current-year trading update from the company.

The group’s half-year end is 30 March, with its interim results due to be announced in May.

Is this wide open to a takeover?

I like what I see in Zytronic – a company with award-winning technology, ‘state of the art’ operations, and selling into a global market, which is cash and assets rich, but where its directors have only 1.52% of the equity. 

I feel that it could well respond very quickly when the pandemic has eased and then recover towards its previous sales and profit targets.

Is it wide open to a US takeover bid? It so easily could be. 

And the directors, with such a poor defensive holding, would probably roll over easily.

The shares, which were over 600p years ago in late 2017, are now just 122.5p.

I now set a target price of 155p.