Zytronic has now released their final results for the year ended 2017.
Revenues increased when compared to last year as a reduction in sales to South Korea and “other” EMEA countries was more than offset by gains elsewhere, with a particularly large £2.1M growth in UK revenue. Cost of sales also increased to give a gross profit £395K higher. There was a £972K beneficial movement in net forex differences but amortisation grew by £69K and other admin expenses were up £234K to give an operating profit £1.2M higher. Interest payments were broadly flat but tax charges grew by £642K due to last year’s credits to give a profit for the year of £4.6M, an increase of £501K year on year.
When compared to the end point of last year, total assets increased by £1.2M driven by a £1.3M growth in cash, a £236K growth in inventories and a £281K increase in development expenditure, partially offset by a £237K decline in trade receivables and a £228K fall in plant and machinery. Total liabilities declined during the year as a £350K growth in deferred tax liabilities was offset by a £1.1M decrease in the bank loan and a £959K eradication of the forex hedge liabilities. The end result was a net tangible asset level of £25.4M, an increase of £3.3M year on year.
Before movements in working capital, cash profits declined by £779K to £5.5M. There was a cash outflow from working capital and despite tax payments reducing by £55K, the net cash from operations was £4.6M, a decline of £920K year on year. The group spent £472K on property, plant and equipment along with £600K on intangible assets to give a free cash flow of £3.6M. Of this, £2.4M was spent on dividends and £1.1M went on loan repayments. Proceeds of £1.2M were made from new share issues relating to share options so the cash flow was £1.3M to give a cash level of £14.1M at the year-end.
The growth in revenues during the year has primarily arisen from an increase in further projects for the gaming market with the growth driven by large format touch sensors. Total exports declined marginally as a consequence of the as expected drop in legacy display product revenues due to £200K of non-recurring revenues from the completion in 2016 of the curved gaming display unit project in Korea and a further £200K reduction in global ATM display revenues.
The gross margin reduced somewhat due to increased costs of raw materials and purchasing more pre-prepared glass; additional costs of wage rises and increased numbers of personnel in production; and increases in commissions payable as more revenue arose from channel partners. Admin costs increased slightly due to higher costs of professional fees, marketing and travel.
Revenues generated by sales of their touch products were £2.4M higher than in the prior year. This growth came from UK sales for the gaming market where product is immediately shipped by their customer to other international locations for integration with displays and gaming machines. Touch revenues are linked to the number of touch sensors produced and the mix of sensor sizes and the group benefited from a shift to larger sensors this year.
In touch application markets, gaming revenues were up £1.8M as new UK and Asian PCT and MPCT projects moved into production. Conversely finance revenues were down £100K due to supplier consolidation and saturation of mature geographic markets. Vending revenues increased by £700K with benefits coming from drinks, fuel and parking management systems in the US, Korea and Germany respectively but with the expected redesign of the next generation Freestyle drinks dispenser in 2018 resulting in a less durable and functional touch solution requirement they expect the requirements of the existing design to reduce as the project moves towards end of life.
The industrial market saw a £400K increase in revenues, predominantly through new opportunities generated by their Italian partner. This was countered by a £200K decline in the signage market with a 1000 unit reduction in large sensors sold from the channel partners in Korea and Germany. The other markets saw revenue decrease by £200K with volume declines in home and health. The group believe that volumes for the touch solution for the high-end Bosch cookers will continue to reduce as the models move to end of life.
The primary emphasis of the R&D team during the year was the continued development of their MPCT capabilities and the requirements of the developing Application Specific Integrated Chip. Initial approval samples of the designed ASIC were received in late January, followed by several months of in-house approval and compliance testing. In May they provided approval and the order to build and supply an initial 24,000 ASICs. Supply of production chips is expected in December 2017. A new family of controllers incorporating the ASICs has been designed along with new bespoke firmware which will be released under the controller family designation series ZXY500 early in the 2018 calendar year.
Going forward, the current year has started with orders, revenue and trading along similar levels to that of the prior year. The focus on growth this year will be from expansion in local sales reps in the US and Far East.
At the current share price the shares are trading on a PE ratio of 17.1 which falls to 16.4 on next year’s consensus forecast. After a 32% increase in the dividend, the shares are yielding 3.9%, increasing to 4.6% on next year’s forecast. The group has net cash of £14.1M as of the year-end.
Overall then this was a decent year for the group. Profits increased, helped by a favourable forex hedge and net assets also increased. The operating cash flow did decline but there was still a decent amount of free cash being generated. The good performance is all down to the gaming market and I am a little concerned that there seem to be a couple of projects in other market areas coming to the end of life. I am not sure if there is enough coming on stream to adequately take up the slack. The forward PE of 16.4 doesn’t look majorly cheap but there is a lot of net cash here and the forward yield is forecasted to be 4.6%. A tricky one this, I am minded to take a proportion of my money off the table.
On the 22nd February the group released a trading update where they stated that current revenues and profits over the first four months of the year were broadly in line with the equivalent period last year, which sounds a little disappointing to me.