11 Dec 2012 - Interesting growth company - Zytronic (ZYT)

Zytronic (ZYT)

318p (at CoB 11 Dec 2012) * 14.9m shares in issue = £47.4m Mkt Cap

Invitations to meet company management often hit my inbox these days, as more brokers and PR companies recognise the useful role I can play as a conduit between the City and private investors, a role I'm very happy to play for quality companies only!

I've held shares in Zytronic before (but not currently), so was pleased to meet their CEO and FD today at Buchanan's offices, for a results presentation and lunch. Many thanks to Buchanan for their excellent hospitality!

As an aside I must also mention my astonishment when at the end of the meeting, whilst I was chatting to Zytronic's FD, another attendee at the meeting  chucked two ten pound notes across the table at me, and just said, "for your running fund!", smiled and disappeared. I was so taken aback, I didn't properly thank him! So if you're reading this, thank you so much for your generosity, and I have paid it across to the charity on your behalf through JustGiving.

What do Zytronic do? They are a specialist manufacturer of rugged, larger, touch screens, typically for ATMs, vending machines, betting terminals at casinos, etc. About two thirds of their touch screens are 15-20" (across the diagonal), with the trend being towards larger sizes still. They are based in the North East of England, and manufacture everything themselves in clean rooms in 3 factories.

Their results issued today for y/e 30 Sep 2012 can be found here.

I'm very pleased to see that the results presentation given at the meeting today is also on their website here. That's very shareholder-friendly, hence gets a big thumbs up from me.

Looking briefly at their results, turnover was flat at £20.4m, but operating profit rose a respectable amount from £3.7m to £4.3m, due to high achieved gross margins. Margins are expected to continue rising, and the company is targeting an increase from mid-30%'s to low-40%'s. You can do the maths, but that makes it look to me as if it probably won't be long before profits pass the £5m p.a. level.

EPS moved up a useful 21% to 22.2p. So at the current share price of 318p that works out at a PER of 14.3 - which in my opinion looks about right for a solid growth company in a nicely profitable niche.

So it all boils down to the outlook. The reason the shares dropped sharply this morning, and then partially recovered intra-day, is because the results said, "current trading is behind the equivalent period last year ...".

As I pointed out to the CEO, the mistake was not quantifying this. So the market will take a knee-jerk reaction, assuming the worst. Whereas it would have been better to say that sales are down x%, and whether that trend is likely to improve & if so how much. It's all about managing expectations. Uncertainty breeds fear!

Face to face, management were explicit in saying that the outlook is "very positive", with new projects in the pipeline. Their sales tend to be project-based, but once a component has started to be supplied to a customer (say, a new ATM machine screen), then that contract will tend to run for several years, giving good visibility to sales.

The latest house broker is forecasting 23.5p EPS this year, but my instincts tell me that management are looking to out-perform that figure, so perhaps 25-26p EPS might be more realistic for the current year, if new projects happen as planned. They talked about growth coming in waves, with a wave of new products on the way now, but timing always uncertain as out of their hands.

Turning to dividends, there has been another useful rise to 8.5p total divis for y/e 30 Sep 2012. So that is a yield of about 2.7%, and the divis have risen very nicely from 3p in 2007. Similarly, EPS has a great track record of rising a decent % each year from 2007. So if you look at ZYT as a long-term investment, it makes a lot of sense, assuming that growth continues. Given that such growth has been achieved against the background of the worst financial crisis in living memory, then it is actually pretty impressive. Imagine what additional growth they could achieve once Western economies are recovering?

Worth noting that the tax charge should gradually reduce as a percentage in coming years, due to enhanced R&D allowances, and the "Patent Box" scheme recently set up by the Govt, which sounds very interesting & allows companies to pay just 10% tax on profits from specific UK Patents.

There are also more efficiencies to be had, in particular they noted that their current manufacturing facilities could handle 3-times the current volume output if needed, so continued growth will mean higher margins as they become more efficient utilising surplus capacity.

Net cash has risen to £2.3m, and the company is very comfortable about its financing generally - as I discussed with their FD, they are able to take long-term decisions in the best interests of the business, without having to worry about cashflow issues.

Conclusion? Really nice growth company. I like the management, who seem serious & focussed. It has a strong  track record of steady growth with no mishaps. Rising dividends. Niche products with 20% operating profit margin (indicating pricing power). It's the sort of long-term growth stock that I would be happy to put into a SIPP or other long-term portfolio, with the intention of holding for 5 years or more. Being an AIM stock it also has IHT exemption as well - useful for wealthy elderly investors.

I don't see any immediate big upside on the share price, so won't be buying any just yet, but it's certainly a stock that will be high on my watch list, and if I could get in around 200-250p then I'd load up with them. The time to buy might well be when the next set of interims come out, as they will be up against a strong H1 last year, which might trigger a short-term fall in price perhaps?

So, a quality company, price is probably about right at the moment at 318p, but I'll be looking to buy on any big dips!

P.S. Out of interest, I've had a quick look at the 2011 Annual Report for Zytronic, to see what level of Director remuneration they pay, as that is a big issue to me & many other investors.
What a refreshing change to see Directors that pay themselves sensible, reasonable, real-world salaries. The CEO is paid a basic of £108k, and his total including bonuses & BIK is £144k. The FD's total is £123k.
Remember this is for performing well - with a growth company, that is creating shareholder value, paying divis, and has a rising share price.

Compare Zytronic with the delusional, arrogant Directors of Inland (INL), who pay themselves multiples of these amounts, despite presiding over 5 years of share price weakness (still 60% down on their IPO), and only one derisory dividend!

I am really warming to the idea of investing in companies in the North East. As with Vianet, Zytronic seems a sound growth company, run by people who respect shareholders, and only ask a reasonable return for their work. This is a serious point actually, as they also have much lower overheads (rent, rates, and staff all a lot cheaper than in the South East), and the culture genuinely seems different - people who are prepared to work hard, and only ask for a fair salary. As opposed to the rampant greed we so often see from South East/London companies.