Elite Client Idea #87

Zytronic plc ‘Zytronic’ (LSE ticker: ZYT; Price: £0.63/share)

(Latest financials are for the year ended September 30th 2023)

Zytronic is a UK-based bespoke manufacturer of interactive touch sensor products. It has 50+ years of experience in glass processing and 20+ years in touch controller development.

It generated FY23 revenues from gaming (28%), vending (30%), industrial (14%), financial (13%), signage (7%) and other (8%) segments.

 

Geographic sales split: South Korea (30%), US (14%), Hungary (9%), UK (8%), Rest of Europe (30%), Others (9%).

 

Three customers accounted for 35% of revenues.

 

Zytronic has been battered in recent years by Asian competition on pricing. It also faced cost increases on raw materials (e.g. semiconductors) due to supply-chain disruptions. Furthermore, the lack of face-to-face meetings after the pandemic adversely affected sales generation.

 

Zytronic reported continuous declines in revenues and profits since FY17. It reported FY23 revenues of £8.6mn (FY22: £12.3mn), pre-tax operating losses of £1.1mn (FY22: +£0.7mn), and net losses of £1.6mn (FY22: +£0.6mn)

 

A major gaming customer filed for bankruptcy resulting in receivable and inventory write-downs (£0.6mn). Another major vending customer overstocked in FY22 resulting in lower orders for FY23.

 

FY22 pre-tax operating profits of £0.7mn appears indicative of current earning power. Average earnings since FY17 were £1.4mn/year. Though recent results are most relevant for this high-technology business, the past record does indicate management capability.

 

Average gross margins of ~31% corroborates some pricing power in Zytronic’s quality products. Further, cash conversion is excellent.

 

Its balance sheet is strong with cash of £4.7mn. It has an undrawn overdraft facility of £1.5mn – resulting in available liquidity of £6.2mn.

 

Net current asset value is £7.6mn. This included inventory (mostly raw materials) of £2.7mn, which is higher than historic averages. This was due to preferential pricing received prior to year-end. Reverting to mean results in a ~£1mn adjustment.

 

Tangible equity stood at £12.6mn and included land/property (£3.8mn) and plant/machinery (£1.2mn).

 

The equity trades for £6.4mn, which is below net current asset value, 2.4x operating profits (net of cash), ~5x average earnings, and 51% of tangible equity. Further, it’s ~97% backed by available liquidity alone.

 

The opportunity pipeline (registered in Zytronic’s CRM system) has picked up to FY20 levels. Management has historically closed 34% of available opportunities – indicating a potential return to normalcy in the near future.

 

Dividends and repurchases are now cut to zero – but management has distributed £9.2mn in aggregate since FY21 and appears shareholder-oriented.

 

The downside risk is low and this seems a cheap call option on future developments in this business.