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Reliable growth and income with Zytronic
Reliable growth at a reasonable price is not always easy to find among smaller companies but Zytronic (ZYT:AIM) is a UK technology business that offers just that. Paying dependable dividends on a 4%-plus yield, investors get a carefully run, attractive, income-paying stock with all the tax breaks that AIM offers.
The shares often look inexpensive relative to the wider sector; they currently trade on a forward price to earnings (PE) multiple of 14.2 for the full year to 30 September 2017. The rating dips to 13.5-times 2018 forecasts. This is largely due to the project nature of its contacts with limited forward visibility, a factor that upset trading briefly in early 2013.
But Zytronic is also a big exporter (95% of revenue goes overseas) that stands to leverage the weak pound through this year and beyond as previous hedging contracts unwind. It is also improving the quality of its profits through judicious investment in research and development, and has emerging growth market opportunities before it.
Bigger displays, higher profits
The Newcastle-based company designs and builds rugged, mainly touch-interactive displays. It built its reputation on outdoor applications, ATM machines in particular, but is increasingly tapping new markets. Interactive screens for gaming terminals are a significant market, plus vending machines, medical appliances, entertainment displays and other industrial applications where touch-screen controls tend to get bashed about. It supplies the displays for London’s ‘Boris Bikes’ terminals, for example.
For many of the company’s customers bigger is better. Much larger and curved touch displays are in demand, 30 inches or larger, used as they are to engage with consumers or boost productivity. This is a plus for Zytronic because it means more capacitive technology components are used per unit, boosting profit margins.
The company sold 14,000 display units of 30 inches or bigger last year, up from 9,000 in 2015, helping gross profit margins improve from 41.9% to 42.8% year-on-year.
Encouragingly, underlying trading continues to strengthen. Given management’s typically cautious guidance, this could see the company outperform current expectations. Further positive notes on trading would likely see forecasts raised, bolstering investor sentiment further and trigger a meaningful re-rating of the stock.
With net cash of £11.6m (19% of the market cap), there’s also a decent chance that some of that surplus money could be returned to shareholders as a special dividend. (SF)
Zytronic (ZYT:AIM) 405p
Stop loss: 324p
Market value: £61.7m