Having investigated this a while back, I took a pass because I believed there were just too many moving parts to make an accurate judgement on either future direction or mispricing. Find some of my notes below.
My main impressions/reservations were:
(1) clear multi-year headwinds in revenue streams – especially their cash cow segments ATMs and gaming – with ATMs coming to an end;
(2) poor cost management despite obvious operating leverage and negative revenue trends (CEO has a history in engineering & sales);
(3) disruption in the smaller touch screen segment (biggest market) by competitors that can deliver higher volumes faster (e.g. automotive, airlines, ...). I assumed a lot of their IP should be valued at zero as a result of this;
(4) the European POS industry as a whole has been under pressure the last 4-5 years which management somehow failed to notice;
(5) limited value for an acquirer within the industry (assuming worthless IP and limited repeat business moving forward);
Some other notes:
* AURES Technologies (AULAR.PA) – is a French POS manufacturer (micro cap) which went through a similar environment and operating leverage as Zytronics leading to heavy losses. It recently got acquired making it a 2x for those that managed to buy the trough.
* Zytronics grew out of a safety glass manufacturer. I believe their main product differentiator has historically been the durability of their touchscreens, which was driving repeat business in ATMs and gaming. In light of this, I believe their attempts at differentiation and IP didn't add much value.
* Management stated in one of their reports since the pandemic that they believed their ATM revenue would come to an end after losing a big repeat customer. They also shared that all ATM revenue moving forward is coming from ATM maintenance – not new machines. They also observed a secular trend in end customers preferring to purchase OEM ATM machines with shorter order cycles, rather than custom-built ATM machines (their customers).
“The Company is today announcing its intention to undertake a strategic review (the "Strategic Review"), in conjunction with shareholders, to assess the future options for the Company, which are:
1. the implementation of a new strategic business plan ("Transformation Plan");
2. an orderly solvent liquidation of the Company's assets;
3. the potential sale of the Company;
4. delisting and continuing as a private company, either:
a. continuing with the business as currently undertaken but without the considerable costs associated with maintaining the Company's admission to trading on AIM, or
b. implementing the Transformation Plan; or
5. selling the Company's assets and continuing as a cash shell.”
Of the above Nr.1 would fall into my “Recovery” scenario above. I now think the probability of that is perhaps 5%. If option 1 gets adopted the probability of its success is low. If we assume that the final value of this scenario is 400 and probability is 5% then the expected value of this scenario is 15.
Options 2 and 3 fall into the Quick Fail scenario – wind-down or sale. Now the market cap of the business is around £5m and they still have some cash ~ £3.7m. They have the approx. £10m in real estate and I’d assume most of the cash will disappear by the time of a sale/liquidation so it’s worth perhaps 200 in final value so expected value of 35 if we assume the probability of this scenario is 35%.
The Slow Fail scenario is still the most likely in my view ~ 60%. It includes the options 1 and transformation plan failing and options 4 and 5. I suspect the management will push for the transformation plan for their own sake and their workforce. Although there are several deep value investors invested (perhaps 30% of ownership) in the business what are the chances of them getting their way? If we accept that the probability is 60% and final value perhaps 30 then the expected value is still -42.
Overall expect value dropped to 8 (15 + 35 - 42). I don’t have any shares now, will I buy them now? No. If I had shares would I sell them now? Probably not.
Having investigated this a while back, I took a pass because I believed there were just too many moving parts to make an accurate judgement on either future direction or mispricing. Find some of my notes below.
My main impressions/reservations were:
(1) clear multi-year headwinds in revenue streams – especially their cash cow segments ATMs and gaming – with ATMs coming to an end;
(2) poor cost management despite obvious operating leverage and negative revenue trends (CEO has a history in engineering & sales);
(3) disruption in the smaller touch screen segment (biggest market) by competitors that can deliver higher volumes faster (e.g. automotive, airlines, ...). I assumed a lot of their IP should be valued at zero as a result of this;
(4) the European POS industry as a whole has been under pressure the last 4-5 years which management somehow failed to notice;
(5) limited value for an acquirer within the industry (assuming worthless IP and limited repeat business moving forward);
Some other notes:
* AURES Technologies (AULAR.PA) – is a French POS manufacturer (micro cap) which went through a similar environment and operating leverage as Zytronics leading to heavy losses. It recently got acquired making it a 2x for those that managed to buy the trough.
* Zytronics grew out of a safety glass manufacturer. I believe their main product differentiator has historically been the durability of their touchscreens, which was driving repeat business in ATMs and gaming. In light of this, I believe their attempts at differentiation and IP didn't add much value.
* Management stated in one of their reports since the pandemic that they believed their ATM revenue would come to an end after losing a big repeat customer. They also shared that all ATM revenue moving forward is coming from ATM maintenance – not new machines. They also observed a secular trend in end customers preferring to purchase OEM ATM machines with shorter order cycles, rather than custom-built ATM machines (their customers).
From https://data.fca.org.uk/artefacts/NSM/RNS/5390658.html:
“The Company is today announcing its intention to undertake a strategic review (the "Strategic Review"), in conjunction with shareholders, to assess the future options for the Company, which are:
1. the implementation of a new strategic business plan ("Transformation Plan");
2. an orderly solvent liquidation of the Company's assets;
3. the potential sale of the Company;
4. delisting and continuing as a private company, either:
a. continuing with the business as currently undertaken but without the considerable costs associated with maintaining the Company's admission to trading on AIM, or
b. implementing the Transformation Plan; or
5. selling the Company's assets and continuing as a cash shell.”
Of the above Nr.1 would fall into my “Recovery” scenario above. I now think the probability of that is perhaps 5%. If option 1 gets adopted the probability of its success is low. If we assume that the final value of this scenario is 400 and probability is 5% then the expected value of this scenario is 15.
Options 2 and 3 fall into the Quick Fail scenario – wind-down or sale. Now the market cap of the business is around £5m and they still have some cash ~ £3.7m. They have the approx. £10m in real estate and I’d assume most of the cash will disappear by the time of a sale/liquidation so it’s worth perhaps 200 in final value so expected value of 35 if we assume the probability of this scenario is 35%.
The Slow Fail scenario is still the most likely in my view ~ 60%. It includes the options 1 and transformation plan failing and options 4 and 5. I suspect the management will push for the transformation plan for their own sake and their workforce. Although there are several deep value investors invested (perhaps 30% of ownership) in the business what are the chances of them getting their way? If we accept that the probability is 60% and final value perhaps 30 then the expected value is still -42.
Overall expect value dropped to 8 (15 + 35 - 42). I don’t have any shares now, will I buy them now? No. If I had shares would I sell them now? Probably not.
There is also this - https://www.wsj.com/tech/personal-tech/touch-screens-are-over-even-apple-is-bringing-back-buttons-86fb9ea8 - it could be that people are wising up to touchscreens. Other than on the phone/tablet I can't actually think of an application where using a touchscreen is not frustrating...