ZTEST (through its wholly-owned subsidiary Permatech) is a tiny, printed circuit board (PCB) manufacturer that is now growing significantly–H1 2024 revenues were 88% higher than H1 2023 revenues.
In December 2022, then President John Perreault retired and was replaced by Suren Jeyanayagam, who has been with the company over 30 years. Whereas Perreault did not have any desire to grow the business, Jeyanayagam has a vision to grow the business and has been aggressive in driving revenue growth. Jeyanayagam is directly involved in the sales process, working with the company’s one other salesperson.
The company currently has a strong backlog of orders, which they expect to continue. Jeyanayagam has stated that the most recent record quarter is repeatable in terms of revenue and net income. More and more customers are looking for domestic manufacturers rather than looking overseas.
Furthermore, the company has recently ordered new equipment, which will be installed this month (May 2024). This equipment will double the number of production lines the company has from two to four. And ultimately this will more than double production capacity, as the new equipment is more efficient because of some automation components.
Also, the company is now expanding into the United States. ZTEST has a significant customer south of the Canadian border. There are opportunities for large repeat orders from this same customer once the current order is complete. Large orders have higher gross margins due to bulk inventory orders and economies of scale.
Finally, the company has a 25.3% ownership stake in Conversance, which is a private AI and Blockchain company developing a secure marketplace platform for the cannabis industry. Conversance is expected to begin producing revenues in the second half of 2024.
Although ZTEST’s most recent quarter–in which they earned $0.011315 per share–is their best so far, the company has a strong backlog as well as new manufacturing capacity coming online. Also, as noted, the President Suren Jeyanayagam is very focused on growth.
Metrics of cheapness (based on annualizing the most recent quarter):
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- EV/EBITDA = 3.58
- P/E = 5.80
- P/B = 6.04
- P/CF = 3.87
- P/S = 0.89
The market cap is $9.14 million. Cash is $732k while debt is $153k.
Insider ownership is 36.7%, which is excellent. ROE is 74.34%, which is superb and likely sustainable.
Intrinsic value scenarios:
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- Low case: If there’s a bear market or a recession, the stock could decline 50%. This would be a buying opportunity.
- Mid case: Annualizing the last quarter’s result and applying a 10x EV/Net Income multiple yields a valuation of $0.4526, which is over 70% higher than today’s $0.2628.
- High case: It’s likely that ZTEST can achieve net income above their last record quarter. Annual earnings may reach $0.10 per share. Applying a 10x EV/Net Income multiple gives a valuation of $1.00, which is over 280% higher than today’s $0.2628. This still does not count any value from the company’s 25.3% ownership of Conversance.
RISKS
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- Joseph Chen owns 17.4% of ZTEST shares, but he is the founder of Conversance–in which ZTEST has a 25.3% take. There is concern that Joseph Chen will try to take control of ZTEST and use its cash flows to fund Conversance. If Chen does this and Conversance is not profitable, it could take down ZTEST.
- In the past, ZTEST has had supply chain problems that slowed production. However, Suren Jeyanayagam and other top executives have said that there is currently no concern regarding the supply chain.
- The PCB industry has many competitors and no barriers to entry. But ZTEST stands out with quality products, good customer service, and quick turn-around times.
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