Supersonic Zytronic does it again

Profits have gone through the roof at touchscreen sensors firm Zytronic over the past six months. But there's a belief in the City it could do even better, and even with the shares up as much as 6% at a record high Tuesday, the valuation is not off-putting.

AIM-listed Zytronic, which has made a full and impressive recovery since a profits warning in 2013, sold £10 million of touch sensors to manufacturers of vending machines, games systems and bank ATMs in the first half to 31 March. That's 20% more than the previous year.

Given a sharp increase in demand for higher-margin large screens, pre-tax profit surged by 44% to over £2.5 million, giving earnings per share (EPS) of 13.8p. As well as the weak pound - the Newcastle-based company grew exports by £0.8 million to £8.8 million, and receives a translation benefit - it did more work for Coca Cola following a quiet 2016. There was also money from a customer in Germany making car park ticket machines

Revenue from lower-margin non-touch products - the original non-touch glass display products Zytronic has been diversifying away from - fell by around 19%, but total sales still rose by 14% to £11.3 million. Gross margin increased by 80 basis points to 43.1%.

"The second half of the year has started well and is in line with expectations and on this basis we expect to make further progress in creating value for shareholders," said chairman Tudor Davies in what was a typically short statement.

The balance sheet looks more robust, too, with net cash increasing to £12.5 million, worth about 82p per share. That bankrolls a 10% increase in the interim dividend to 3.6p.

And, while N+1 Singer analysts Jon Lienard and James Tetley keep their profit forecasts unchanged, the house broker does see "potential for upside if positive trading momentum continues".

Potential surprises could come from either the oil & gas industry, where contracts are expected to be revived once industry conditions improve. More interestingly, chief executive Mark Cambridge talked to Interactive Investor about a possible opportunity in the Far East.

Given high-profile data breaches, cyber security is all the rage again, and Cambridge says encryption products for the touch screen industry are inevitable.

Japan is often an early adopter, and the banking industry there is worried about stress on the ATM system following an influx of western credit cards expected during both the Rugby World Cup in 2019 and Olympics in 2020. Major upgrades to the current chip and pin set-up will be required, and the Japanese are tipped to want the next stage in technology.

"With underlying trading remaining positive, we continue to feel that an FY17 [price/earnings (PE)] rating of 15.6x is inexpensive for a growing technology business with a very strong balance sheet and a dividend yield approaching 4%," writes Singer.

However, strip out the cash pile - about 17% of market cap - and Zytronic trades on a cash-adjusted PE of just 12.7.

A capital reduction scheme has also freed up £8.9 million of Zytronic's undistributable profits. It's up to management what it does with the money - and Cambridge always tells us he likes a buffer just in case - but one option for the company would be to beef up the dividend.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.