Business mix

Zytronic today posted results for its financial year ended 30 September. Revenue of £22.3m was down 2.6% on the prior year, with growth in sales of touchscreens to the gaming sector only partially offsetting a decline in sales to financial markets.

Group pre-tax profit dropped 23% to £4.2m. The much bigger drop in profit than in revenue was largely due to a fall in gross margin to 37% from 41.1%. Management said the margin contraction was principally down to “labour and material inefficiencies, as new and different products and methods associated with gaming replaced more familiar tried and tested touchscreens for the ATM sector.”

Valuation and outlook

At a current share price of 340p (down 8.1% on the day), Zytronic trades on 15 times earnings per share (EPS) of 22.7p. However, with the company’s balance sheet boasting cash of £14.6m (91p a share) and no debt, the earnings multiple comes down to a much more attractive 11 on a cash-adjusted basis.

Adding to the attraction is a 22.8p dividend, which gives a juicy yield of 6.7%. While the payout isn’t quite covered by EPS, it’s comfortably covered by cash flow. I’m expecting new product launches and improved margins from production efficiencies to drive revenue and earnings (and the dividend) higher for fiscal 2019. I reckon we’re looking at a forward cash-adjusted earnings multiple of below 10 and a prospective dividend yield of over 7%.

Zytronic may be a relatively small company (its market-cap is £55m), but with its strong balance sheet and attractive valuation, I rate it a ‘buy’.

Setback

IQE’s shares hit a high of over 160p just over a year ago, but are currently changing hands at around 70p, giving it a market-cap of £544m. Last month, it had to issue a profit warning for the current year. This was because a major chip company in the supply chain had received notice from one of its largest customers for 3D sensing laser diodes to materially reduce shipments for the fourth quarter.

As a result, IQE said it now expects to deliver revenue of approximately £160m this year (little changed from last year), and earnings before interest, tax, depreciation and amortisation of £31m, from £37m last year. City analysts expect this to translate into a 46% fall in EPS to 1.95p.

Technology leadership

Despite the setback for the current year, analysts forecast revenue increasing over 20% in 2019, and EPS soaring almost 80% to 3.5p. This puts it on an earnings multiple of 20 at the current share price, which is quite a rich rating. Indeed, too rich, according to a number of hedge funds, who have continued to position themselves to profit from the shares falling lower.

Critics have questioned whether the company has the “technology leadership” it claims. In view of this, I’m inclined to avoid the stock until there are signs of a big step-change in revenue that would support the technology-leadership claim and a high earnings rating.

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Hidden gems

But I’ve never really been a fan of viewing the market as a single entity, I’d much rather evaluate each individual company on its own merits. The market on the whole may look overstretched, but there are still plenty of undervalued companies on the shelf just waiting to get noticed.

While it’s true that London’s junior AIM market has often been dubbed the ‘Wild West’, it can still be a great breeding ground for tomorrow’s industry heavyweights. And while investors should be extra cautious when venturing into the hidden depths of the world of small-caps, it’s very possible that careful stock-pickers can unearth some true hidden gems from among the smaller London-listed companies.

Five granted patents

One that looks particularly worthy of consideration right now is leading specialist touch sensor manufacturer Zytronic (LSE: ZYT). Operating from a single site near Newcastle, the AIM-listed firm is now a world-renowned developer and manufacturer of a unique range of optically transparent interactive touch sensor overlay products for use with electronic displays in industrial, self-service and public access equipment.

The company has been developing process and technological know-how and Intellectual Property (IP) since the late 1990s around two sensing methodologies. The first being single-touch self-capacitive, which Zytronic markets as PCT (Projected Capacitive Technology) and the second being multi-touch, multi-user mutual-capacitive, marketed as MPCT (Mutual Projected Capacitive Technology), in which Zytronic holds five granted patents.

Gaming market

Zytronic’s sensing products offer touchscreen solutions to the leisure, digital signage, retail, surfaces, banking and industrial markets. Its touch sensors are used in video jukeboxes and slot machines. The PCT touch sensors are used in a wide range of workplace applications, from medical diagnostic equipment to oil field machinery controls.

Results for the 2017 financial year showed continued growth in revenues, profits and cash generation, leading to a mammoth 39% increase in the final dividend, resulting in an overall full-year payout of 19p per share. Analysts expect the current year payout to be even more generous at 22.8p per share, equating to a healthy 4.6% yield.

But AIM investing is rarely about dividends, the primary focus being significant long-term growth. The Gaming market became the company’s top revenue-generator in 2017, taking the top spot from the Financial market for the first time in the company’s history, and this will undoubtedly be a huge growth area for the business going forward. With this in mind, I would say Zytronic’s shares currently represent exceptional value trading at 17 times forward earnings. I sense a bargain.

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I’ve closely followed the company for years now because the unique intellectual property that it has created since the late 1990s helps it earn outstanding returns. The company has averaged roughly 19% return on capital over the last five years, while operating margins last year peaked at a whopping 23.7%.

The group’s operational gearing meant that a 9% revenue increase in 2017 turned into a 27% jump in profit before tax. In all, it made £4.6m profit last year, leaving the shares on a P/E of 17.5. 

Low visibility warning

This might seem a bargain given that huge step forward in profits, but Zytronic hasn’t got the best visibility on sales and I believe it is possible it will experience a bad year that could significantly knock the share price. 

This happened back in 2013, where poor orders saw profits slide from £3.3m to £1.7m, sending the shares tumbling. While I believe it is a great business, the market has a short memory. I think investors would be best off waiting for one of these down years to purchase the shares. Those that got in at the bottom in 2013 are now up over 200% before dividends.

For truly long-term investors who are willing to weather some share price volatility, however, I believe now could be a good entry point. The company’s 3.7% yield is nicely covered by cash flow and should survive a bad year or two given the £14m cash on the balance sheet. 

There are certainly worse buys out there than Zytronic right now, but I’ll bide my time for a lower shower price before initiating a position. 

Patent-protected, profit-free

Shares in Versarien Technologies (LSE: VRS) shot up from 14.5p to 80p after releasing interim results in November. The company’s expertise in advanced materials with thermal management properties has clearly chimed with investors and customers alike, with revenues jumping 167% to £4.38m in the first half. 

Despite this progress, I wont be investing in the company for a few reasons. Firstly, I find it hard to tell whether its products are truly unique enough to deliver long-term, market-beating returns. I’m no scientist or engineer, after all, and many companies have struggled to turn a profit from graphene. Secondly, Versarien is not profitable, although it admittedly is taking solid steps towards break-even. Losses before tax halved in H1 to £0.77m. 

Given its rapid growth, I imagine the company will be profitable in a year or two. A successful placing in November has also raised £2.8m net of expenses, so the balance sheet looks secure for now. 

I believe that Versarien has a great shot at becoming a soundly profitable business, but it’s market cap is a massive £108m. That seems quite optimistic given its £1m cash burn in the first half.

I’m not in the business of making speculative investments and, in my opinion, the current valuation would have to come down considerably before I’d consider taking a position in the company. Perhaps I’ll be interested after the company publishes further details on the deal it has signed with two large consumer goods companies, but until then I’ll remain a little wary given the valuation.

The post Why I’d sell Versarien plc and this overpriced growth share appeared first on The Motley Fool UK.

However, there are exceptions. Some stocks could still offer significant upside potential. Here are two prime examples that could help to propel you towards millionaire status in the long run.

Solid growth

Reporting on Thursday was developer and manufacturer of patented touch sensor products Zytronic (LSE: ZYT). The company updated the market with a pre-close statement ahead of its results for the period to 30 September. Revenue has continued to show encouraging progress compared to the prior year, with the company’s results expected to be in line with market expectations.

While it was a relatively short statement, the company’s share price fell 3% in response. This could be due to profit taking, since the stock has risen by around 60% in the last year.

Looking ahead, Zytronic is forecast to post a rise in its bottom line of 4% in the next financial year. While this is lower than the expected growth rate of the wider index, the company has a reliable track record of growth.

For example, in the last three years it has recorded an annualised growth rate of 24%. This shows that it has the potential to outperform the wider index when it comes to growth. And with what appears to be a sound strategy and growing demand for its products, now could be the right time to buy it for the long term.

Turnaround potential

Also offering investment potential at the present time is fellow industrials sector company Weir Group (LSE: WEIR). The company has endured a difficult few years as the price of oil has fallen and negatively impacted on activity within the oil and gas sector. This has contributed to four years of declines in the company’s earnings, which has put investor sentiment under pressure.

Looking ahead however, the company is expected to record a strong turnaround. Weir Group is forecast to deliver a rise in its bottom line of 52% in the current year, followed by further growth of 31% next year. This could be partly because of renewed confidence in the oil and gas industry as the oil price has risen to a two-year high.

This sharp improvement in its profitability could cause investor sentiment to improve dramatically. That’s especially the case since the company trades on a price-to-earnings growth (PEG) ratio of just 0.5 at the present time. This suggests that it has a wide margin of safety which could mean it is worthy of a much higher valuation. Certainly, the company’s shares could be volatile if the oil price moves lower. However, with upside potential it appears to be worth buying right now.

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That said, investors shouldn’t automatically buy those companies offering the largest yields. To really get the benefits from this strategy, you need to be looking to those that are growing their payouts. Here are just two examples.

Multi-bagger

I suspect fantasy figure designer and manufacturer Games Workshop (LSE: GAW) was under a lot of investors’ radars a year ago. Those days are gone. Over 12 months, the stock has soared a quite superb 250%, boosted by the fall in sterling and the fact that the company makes three-quarters of its sales overseas.

Based on the update released earlier this month, this positive momentum looks set to carry on for a while yet. While light on detail, it did state that trading in the first quarter of the financial year had “continued strongly” and that sales and profits for 2017/18 were already “well above” those achieved over the same period in 2016/17.

Recent performance isn’t the only reason to take notice of Games Workshop though. For the current year, shares are forecast to yield a chunky 5.5% thanks to a mooted 82% rise in the total payout. Contrast this with the single-digit rises expected from many of our largest companies and the case for seeking income from businesses lower down the market spectrum becomes a lot more convincing. 

Unlike other multi-bagging stocks, Games Workshop’s stock also remains sensibly valued. Assuming nothing happens on the world stage to scare or delight investors over the weekend, the shares will be trading on just 13 times forecast earnings on Monday.

Dividend hike hero

Market minnow Zytronic (LSE: ZYT) is another stock that’s performed admirably in recent times. Since last September, the share price of the developer and manufacturer of touch sensor products has climbed no less than 57%, further underlining the ability of small-cap stocks to generate substantial returns for holders over short periods.

Capital gains aside, Zytronic also scores highly when it comes to dividends. A forecast 2.8% yield in the current year might feel average but a quick check shows that this company is no slouch when it comes to hiking its annual payouts. With the exception of 2013 (7%), the £96m cap has consistently raised its total dividend by double-digits for many years now.

Although it’s not updated the market for a while, interim numbers released in May would suggest the Blaydon-based business is continuing to make solid progress. In the six months to the end of March, the company’s top line grew by 14% to £11.3m. Pre-tax profit showed an even bigger percentage increase — rising 39% to £2.5m. And while its earnings outlook can lack visibility at times, analysts are still penciling in a 9% rise for the full year, leaving shares trading on a valuation of 21 times earnings. With a history of delivering relatively high returns on capital and strong operating margins (not to mention its net cash position of £12.5m at the end of March), I think Zytronic warrants consideration.

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A quality company

This currency tailwind was evident in today’s results. Revenue for the first half came in at £240.4m, compared with £198.5m in the same period last year. This 21% increase includes a 9% currency benefit.

Profit before tax jumped 25% to £35.7m, although this increase completely reverses to a 7.4% fall at current exchange rates. The weaker pound also helps explain the fall in profit on increased revenues; the company’s international expansion and wages are now more expensive.

The management team should be lauded for including its full-year revenue and profit expectations in the update, allowing investors to more accurately value the company. The predictions were as follows;

“We continue to anticipate growth in both revenue and profit in this financial year and expect full year revenue to be in the range of £500m to £530m and Profit before tax to be in the range of £85m to £105m.”

Renishaw is, in my mind, a quality company. When precision is mission-critical, manufacturers often turn to Renishaw. Aside from being well respected in its niche, the company has a record of strong returns on capital and, aside from a blip around the financial crisis, has an impressive dividend record too. But I can’t quite justify a purchase at current price.

Even at the top-end of expectations, the company would trade at around 20x profit before tax which seems a little steep given the company’s recent growth rates. Buying a quality business like Renishaw at current prices may not be disastrous, but I’m not sure how likely the company is to outperform the market from this valuation.

Impressive margin

Outdoor touch-screen specialists and small-cap Zytronic (LSE: ZYT) might be of interest to investors following Renishaw. Its products are bespoke and the company often designs accompanying software which could inspire customer loyalty in the long-run.

The company manufactures in England but sells the majority of product abroad. Unfortunately for Zytronic, currency hedging means it wont gain any benefits from the low pound for over a year.

Revenues were flat last year, but the company reported an impressive 20% operating margin and improved cash-flow. This year has started well, with “orders, revenue and current trading ahead of the same period last year.”

This, combined with a PE of 15, indicates the technology company could possibly outperform Renishaw in the future.

The post Is Renishaw plc a buy after today’s results? appeared first on The Motley Fool UK.

Pressure Technologies — which designs and manufactures high-pressure systems — advised that revenues had slumped 34% during the 12 months to September 2016, to £35.8m. As a result the engineer swung to a pre-tax loss of £359,000 from a profit of £1.1m in the prior year period.

And Pressure Technologies remains cautious looking ahead as the oil and gas sector could remain under the cosh despite last week’s OPEC accord. The business cited possible compliance issues from the cartel’s participants that could affect total output, as well as the impact of the deal in encouraging US producers to get back to work, a move that could hamper any oil price advances.

Pressure Technologies therefore elected to axe the dividend for fiscal 2016. And the firm is right to be conservative in my opinion. While it has ploughed huge time and money into its Manufacturing Divisions and Alternative Energy operations to diversify away from the oil sector, the engineering giant still sources more than four-tenths of total sales from crude drillers.

The City expects Pressure Technologies to snap back into the black with earnings of 8.8p per share in the period to September 2017. However, I believe these projections could significantly underwhelm and reckon a forward P/E ratio of 16.7 times fails to reflect this.

I believe investors should give Pressure Technologies short shrift at the present time.

Touchdown

Shares in touchscreen builder Zytronic (LSE: ZYT) were also under pressure on Tuesday after a lukewarm response to its preliminaries. The stock was last dealing 5% lower from Monday’s close, taking it away from recent seven-month peaks of 405p per share.

Zytronic advised that group revenues edged down to £21.1m during the 12 months to September 2016, falling from £21.3m in the 2015 fiscal period. And this prompted profit before tax to dip 4% to £4.3m.

However, Zytronic’s bottom-line weakness was prompted by a £900,000 hit caused by fair value movements on foreign exchange forward contracts.

Indeed, the screen star struck a somewhat upbeat tone looking ahead, advising that “the year has started well with orders, revenue and current trading ahead of the same period last year.” Zytronic advised that its strategy of targeting the larger-format touch sensor markets, like those used in the gaming industry, is paying off handsomely and sales of its touch sensor products grew 5% last year.

And the Newcastle firm’s confidence in its long-term outlook was underlined by its decision to turbocharge the full-year dividend — a total reward of 14.41p per share for fiscal 2016 is up 20% from 12.01p for the previous year.

The City certainly retains a bullish outlook for Zytronic, even if earnings growth is expected to slow from an 8% rise last year to a marginal increase in the period to September 2017. I reckon a P/E ratio of 14.4 times is attractive value as demand for Zytronic’s new suite of products takes off.

The post These small caps have dived following today’s updates. Is this a prime buying opportunity? appeared first on The Motley Fool UK.

This is good news for the company’s investors, since Zytronic’s financial performance will reflect the impact of a £0.9m non-cash provision which arises from its foreign exchange policy. However, even taking this into account, Zytronic is on track to perform at least as well as market expectations. This is because of a continuation in the second half of the year of the trend, which was reported in the first half of the year. Touch screen revenues increased relative to both traditional products and on a year-on-year basis.

Looking ahead, Zytronic is forecast to increase its bottom line by 5% in the current year and by a further 3% next year. While neither figure is particularly impressive, Zytronic’s sound financial standing and strategy mean that it offers strong growth potential over the medium-to-long term.

Furthermore, Zytronic has significant income potential. At the present time it yields 3.4%, but dividends are forecast to rise by almost 10% in the next financial year. This puts Zytronic on a forward yield of 3.8%, which for a smaller company is hugely appealing. In addition, Zytronic’s dividend is covered almost twice by profit. This shows that it’s a relatively stable income stock, but also that dividends could rise at a faster pace than profit and not put the company’s financial position into difficulties.

Value for money

Of course, other industrial stocks also have investment appeal. For example, metrology company Renishaw (LSE: RSW) is expected to return to growth following a challenging 2016 financial year. Its bottom line is forecast to rise by 16% this year and with it having a price-to-earnings (P/E) ratio of 19.6, this equates to a price-to-earnings growth (PEG) ratio of 1.9. This indicates that Renishaw offers good value for money. That’s especially the case when Zytronic’s PEG ratio stands at a rather unappealing 3.1.

However, Renishaw’s yield of 1.8% means that it lacks income appeal. Certainly, it’s well covered by profit at 2.2 times and this indicates that dividend growth is on the horizon. However, Renishaw lacks the stability of Zytronic when it comes to financial performance. As mentioned, Renishaw’s profitability was disappointing last year and it declined by 43%. In fact, Renishaw’s net profit was only 8% higher last year than it was in 2011.

This contrasts with Zytronic, which has been able to grow its earnings by 34% in the last five years. Looking ahead, both stocks have bright futures, but Zytronic’s added income appeal makes it the better buy right now. That’s especially the case since it arguably offers a more stable earnings outlook, too.

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The skill, then, is in picking the best stocks and giving them the time to come good.

A very bright future

One company which appears to fall into this category is Unilever (LSE: ULVR). The consumer goods company has a very bright long term future owing mainly to its exposure to the emerging world. In fact, Unilever generates the majority of its sales from developing economies and with wages set to rise rapidly over the coming years, demand for Unilever’s products is likely to increase considerably.

Certainly, Unilever’s share price has performed well in recent years and its shareholders may be tempted to sell at the present time. However, this could be the worst time to do just that since all of the investment which Unilever has made in marketing its products in the emerging world looks set to bear fruit over the next 5+ years. As such, Unilever appears to be a stock to buy and hold forever.

Stunning track record

Also offering excellent long term growth potential is Zytronic (LSE: ZYT). Its track record is stunning, with the touchscreen glass manufacturer recording an annualised growth rate in earnings of almost 11% during the last five years. And with demand for touchscreen products likely to rise over the long run, as their use becomes more widespread across a number of different industries and applications, Zytronic’s outlook is highly positive.

In fact, over the next two financial years Zytronic is expected to continue to record positive earnings growth numbers. And with its shares yielding around 4.2%, they seem to offer excellent income prospects. That’s especially the case since Zytronic currently pays out just 50% of profit as a dividend, which indicates that shareholder payouts could move sharply higher over the medium to long term.

Rising demand

Meanwhile, Iomart (LSE: IOM) also seems to be another stock to buy and hold forever. That’s at least partly because the cloud computing space is likely to be a major growth area in the coming years as more businesses and individuals switch from physical to cloud storage.

As Iomart’s most recent final results showed, it is experiencing rising demand for its services, with sales increasing by 16% and adjusted pretax profit 14% higher than in the previous year. And with the scope for further partnerships within the Hybrid Cloud space, as well as additional M&A opportunities, Iomart seems to be a top-notch smaller company for the long term.

As with Zytronic, Iomart has an excellent track record of profit growth, with its bottom line rising by over 100% in the last four years. And with double-digit growth expected this year, now could be an excellent time to buy the company for the long term.

The post 3 stocks to buy and hold forever: Unilever plc, Iomart Group plc and Zytronic plc appeared first on The Motley Fool UK.

Chalk and cheese

The Dividend Dog is simply a high-yield income strategy, which in truth is one of the simplest strategies in investing. All you need do is select the 10 highest-yielding stocks in a major market index, such as the FTSE 100.

While there are a number of versions of the strategy that use the current or historic dividend yield, I prefer to use the forecast dividend yield as a potential safety net as it tends to filter out the companies that are likely to either cut or scrap the dividend payout, which has happened with mining giants BHP Billiton and Rio Tinto.

This strategy was popularised by Michael B O’Higgins in 1991 and was one focused on US markets where O’Higgins sought out large, mature and well-financed companies with long histories of weathering economic turmoil.

Using Stockopedia I’ve selected banking giant HSBC (LSE: HSBA). It currently has the highest forecast yield (on a 12-month rolling basis) in the FTSE 100 with 7.85% not to be sniffed at.

On the other side of the coin we have companies known as Dividend Achievers. This is a slightly different income strategy, which looks for companies that have grown their dividend payouts for at least the past five consecutive years.

As we’re searching for companies that are growing the payouts we can probably expect a lower yield. However, the trade-off should be that investors see a reasonable amount of capital growth alongside the dividend growth as company earnings grow alongside the dividend.

Again I used Stockopedia and selected Zytronic (LSE: ZYT), a UK-based developer and manufacturer of a range of touch sensor products, and UK-based owner and manufacturer of ceramic tableware brands Portmeirion, Spode, Royal Worcester and Pimpernel, Portmeirion Group (LSE: PMP).

With forecast yields of 3.42% and 2.76%, neither come close to HSBC.

Which strategy is best?

Well, with a quick look at the chart, certainly in terms of capital appreciation both the dividend achievers have beaten both the dividend dog and the market as a whole.

Not only that, if we rewind the clock by 12 months it wouldn’t be too difficult to calculate that the dividend yields wouldn’t have been too different. You see, as the shares of HSBC have slipped, the yield on offer increases. Over at Zytronic and Portmeirion the opposite would be true as even a growing yield will decrease if the shares appreciate enough – as they have in this case.

So, over the last 12-month period it’s clear that the dividend achievers have trumped the dividend dog. However, with a near 8% dividend yield on offer and the recovery potential once management has the business back on track, means it would be foolish to write off HSBC at these levels.

So in answer to the question in the headline, for me there’s a case to invest in all three businesses in order to bring some balance to a portfolio. The solid yield from HSBC, augmented by the earnings and dividend growth of Zytronic and Portmeirion means that this trio is worthy of further research in my view.

The post Should you buy dividend dog HSBC Holdings plc or dividend achievers Zytronic plc and Portmeirion Group plc? appeared first on The Motley Fool UK.