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Questor: the fall in Zytronic shares after its profits warning is a chance to buy on the cheap
Questor share tip: Zytronic still has skilled managers, a strong competitive position and robust finances
A profits warning from Zytronic, the maker of rugged touch-interactive displays and screens, is an unwelcome surprise.
But this column’s faith in the Aim-listed company’s management acumen, long-term competitive position, financial strength and earnings potential is undimmed. So it follows that the nasty tumble in the shares that accompanied the alert has to be treated as chance to dive back in.
Pre-tax profits for the year to September are now forecast to come in at £4.2m against analysts’ previous expectations of £5.2m. Some £300,000 of that shortfall relative to estimates rests with the legal costs relating to what chief executive Mark Cambridge described as a “spurious patent claim”.
The other £700,000 relates to initial costs relating to new screen designs and production costs at the end of the year. These should start to work their way through in the new fiscal year. If and when volumes start to rise, profit margins could expand swiftly as overhead is recovered.
This all therefore feels like a short-term stumble rather than anything more serious, such as a threat to Zytronic’s technological edge. The statement from Cambridge, who has over a decade at the helm, did not smack of panic – and investors should stay calm as well.
It now looks as if the company’s profits will drop year on year for a fifth time since its 2000 flotation, so at least this column’s forecast of earnings and share price volatility looks spot on.
Investors can afford to be patient. Even an unchanged final dividend of 15.2p, added to the increased interim payment of 7.6p, puts the stock on a yield of 6pc. The profit disappointment may mean that earnings cover for such a distribution will be lower than ideal but the balance sheet has net cash.
This company has many moving parts and there is much to be done, but the reduction in debt means that there is no need to give up on the turnaround and crystallise losses.
Questor says: buy
Ticker: ZYT
Shares price at close: 385p
Update: Tesco 5.5pc 2033 bonds
No sooner had this column flagged the importance of an upgrade from credit rating agency Fitch on the Tesco debt from BB+ to BBB- than the grocery giant launched a tender offer for our cherished Tesco 5.5pc coupon 2033 bond. The price promptly jumped by £4 to £120 and it may be worth accepting the offer. This would lock in a capital gain of some £13.60 per bond held, to supplement the coupons received since our initial analysis.
Bondholders have until 4pm on Oct 26 to make up their minds and pricing details will be confirmed on the afternoon of Oct 29. Details can be found on the “Outstanding Bonds” section of Tesco’s website dedicated to debt investors and the bonds can be tendered in units of £1,000.
A price around £120 would put the bonds on a running yield of 4.6pc and a yield to maturity of around 3.8pc. The yield pick-up relative to gilts now looks relatively skinny.
Questor says: sell
Ticker: 31CM
Bond price at close: £120
- Read Questor’s rules of investment before you follow our tips. See Questor's tips every day at twitter.com/DTquestor
Update: Mediclinic
Our research on private hospital operator Mediclinic worked well initially as the shares rose from 600p to more than 700p but all we have had is portfolio pain since then. Another disappointing trading statement last week means the only way to staunch the bleeding is to cut and run.
Mediclinic cited disappointing patient numbers at its Swiss unit Hirslanden, the largest of the company’s three operations at just under half of total sales. Margins also came under pressure here, thanks to change in Switzerland’s regulatory regime. Meanwhile, trading remains mixed in South Africa and the FTSE 250 member had its usual quiet start to its financial year in the Middle East.
The business is more complex than we thought and we have got this one wrong. Time to swallow the medicine and move on.
Questor says: sell
Ticker: MDC
Share price at close: 371.1p
Russ Mould is investment director at AJ Bell, the stockbroker