Orders at rugged touch-screens technology developer Zytronic (ZYT:AIM) have bounced back faster than the market expected, but regular Shares readers will not be surprised. I spelled out in August that a rebound could come much sooner than the market seemed to be predicting given a near-40% collapse after May's profits warning.


Consistent investment in research and development (R&D) is, I believe, one of the keys, allowing the company to expand the product range and tap new emerging markets (vending machines, gaming terminals and medical appliances, for example).


It is working on some interesting curved touch-screens, a new nascent market on which we're likely to hear much more down the line. True, Zytronic is a relatively tiny supplier to many global brands. If Coca-Cola sneezes any delays to vending machines rollout, Zytronic will catch the cold.

ZYTRONIC - Comparison Line Chart (Rebased to first)

Yet colds are temporary and so are Zytronics' troubles. The £27.5 million cap has been able to create and maintain a technological edge. That's important. Profit margins at the relatively bog-standard end of displays get rapidly eaten away as volumes units get commoditised. That's not the Zytronic way. Its gross profit margins rose from 33.7% to 36.3% in the year to September 2012, and an uplift to 40% or 45% is not out of the question in time.


The Newcastle-based company is set to produce pre-tax profits for the year to end September 2013 of about £1.9 million on £17.2 million of revenue, beating the £1.6 million pre-tax £17 million sales previously forecast by broker N+1 Singer. That implies a pre-tax profit margin of just 11%, way down on the 20.6%, 17.6% and 15.7% recorded in the previous three years, which itself shows the scope for a rapid profits bounce in its new financial year.


Singer has responded by upping its pre-tax profit estimate for the year to September 2014 by 10% to £2.2 million and will 'revisit in December' when the company officially posts its full-year numbers for 2013. Assume £19 million of sales, but a pre-tax profit margin bounce to 14%, you'll be looking at £2.7 million pre-tax. If sales go better than that, and/or if margins improve faster, current market assumptions for September 2014 could get blown out of the water.


Even after today's 13% share price jump to 184.5p, 2014's anticipated 9.5p per share dividend implies a 5.1% yield. Yes, dividend cover is just 1.2-times, yet management has shown its steadfast commitment to dividends and cash generation is solid.


It generated free cashflow of £1.7 million in the first half last year, leaving £2.8 million of net cash. Any earnings upgrades will likely stimulate investors' demand for a compelling high-quality growth story with a very attractive income edge.

Issue Date: 09 Oct 2013