QUIXANT GAME FOR GROWTH - 24/03/23

There were some decent results out from Quixant (QXT) earlier this week, which I feel are worthy of a closer look, particularly as I once more had the opportunity to catch up with management.

The company is very much familiar to me, where I first went along for a visit to its Cambridgeshire based HQ at Balsham, soon after the company came to the market back in 2013.

Certainly an interesting location for what is essentially a tech play, the property effectively being an impressive barn conversion in a sleepy village on the outskirts of Cambridge.

It is perhaps worth noting at the outset that there is planning permission for further development at the site, although in a previous conversation with management it was stated that there are currently no plans to proceed with any application to utilise that.

Shares in QXT, which back then was purely focused on providing its own designed and manufactured computing solutions for housing in casino gaming machines such as slots, subsequently went on to perform very well.

A peak of circa £5.00 per share was achieved back in 2018, before a slippage in earnings, followed by the pandemic induced issues resulted in a retrace to a low point of 65p in 2020.  

Initially heavily reliant on one major customer located in Australia, the company successfully increased its reach, winning other major players across the gaming sector who, rather than using their own R&D teams for what are best described as producing the innards or black box of the gaming machine, elected to outsource that to Quixant.

The strategy worked well with a manufacturing operation in Taiwan, along with a technical team based in Italy that was originally made up of a small number of ex-Erikson technicians.

Although like others in the tech space QXT has endured a tough period through the pandemic along with subsequent supply chain issues, it nevertheless looks to be well back on track and although the shares are now up to the £1.80p level, they merit my attention once again.

The business is a much larger beast now though, following the acquisition in 2015 of fellow AIM constituent Densitron, which incidentally is where the founders and current CEO Jon Jayal were all previously employed.

Although Densitron had been a poor performer as a listed entity, it nevertheless had some very interesting tech and the QXT team clearly knew it well, hence the purchase and subsequent turnaround of that operation.

The final results as revealed to the end of December 2022 saw record revenue of $119.9m which delivered adjusted pre-tax profits of $10.2m, with EPS of 17.8c, although the latter was flattered by a tax credit.

Still, the results were clearly positive as is the mood music on prospects going forward, which sees the company well placed to make further progress on the growth path.

Additionally, and importantly, in what are clearly tough and uncertain times, QXT sports a very sound balance sheet with net cash of $12.9m, which sees it looking better placed than others saddled with debt in a higher interest rate environment.

CEO Jayal, sounded a positive but grounded note on the numbers and progress delivered with a confident, if cautious tone regarding future progress, citing their post 2019 focus as being a catalyst in relation to the recent results and delivery.

He said, that 2019 had been a very difficult year which resulted in their subsequently being thoroughly focused on diversifying the business right across the gaming field and other areas, with the targeting of new customers along with a firm concentration on the mix.

New sectors and additional products across the business, including those within Densitron were targeted, which as part of that resulted in the success of a new gaming cabinet offering culminating in a mass production order.

The new range launched, saw names such as Quantum and Qinetic emerging, which were produced with tailored requirements to meet legislation across the broad spectrum of the gaming industry.

This, alongside its production of casino computer gaming boards has seen it winning new customers into the fold and the moving into other areas of the sector.

Additionally, Jayal spells out for me the importance of the broadcasting exposure, which has seen an increased headcount and investment with a more diverse offering and reach.

Looking at the various aspects of the now enlarged operation, it is perhaps worth touching on each one.

On the gaming front, QXT is focused on computers and cabinets which sees  both the software and hardware elements being provided in what is a highly regulated industry, creating barriers to entry.

The market is a vast $3bn overall opportunity, of which with its current offerings provides for a near term addressable $310m, so plenty for the company to target for growth.

In relation to the broadcast aspect of the business, this revolves around QXT’s human machine interface solutions that allow broadcast customers to modernise the way they control equipment.

The products enable for the replacement of antiquated mechanical controls in exchange for touch screens.

This also seemingly provides for another big opportunity for the company where with its existing products there is an annual $220m market, of which QXT currently accounts for just a 3% share.

There is also the Densitron display components arm to add into the mix, where electronic display modules are supplied to a wide range of industrial customers who then apply or insert them into their own equipment.

Another big end market opportunity worth a total $6bn per annum, of which the company is currently only scratching the surface.

Nothing of course is guaranteed, particularly in a tough economic climate, but QXT clearly has plenty on which to focus and appears to be heading in the right direction.

Emerging from the pandemic tunnel CEO Jayal attributes the company’s sound performance to a number of factors, including being a trusted supplier with strong relationships that have in turn not only seen customers retained, but critically new one’s gained.

There is however more to do, he says, where, as profitability and gross margins improve, there will be a continued push with the growth strategy driven by new products and markets.

Like many other businesses, QXT has not been immune to supply chain issues, which Jayal says are still problematic and resulted in 2022 proving more difficult than they had envisaged.

Still, they have, he says, managed to cope with that and there has been something of a stabilisation of component prices which has also seen the company taking action to protect margins.

He adds that they have done a lot of hard work, which now sees them well placed to supply customers both existing and new.

Sporting a healthy balance sheet with a significant net cash position has also played a key part, which has aided working capital and the accumulation of stock to meet requirements, alongside providing customers with an underlying confidence.

Despite sitting on a decent cash pile, there is certainly no throwing caution to the wind, as the plans going forward are to look very carefully at how to actually deploy any of that in order to make sure the business continues to grow.

In the past, on the trading front,  QXT has delivered a decent return on capital employed (ROCE), which although obviously dented from 2020 onwards, is now scaling in the right direction.

Free cash flow had also been on a consistent growth path, so further evidence of that tracking northwards again, should also put the company on the map once more and provide for further investor confidence.  

There is also a small but progressive dividend which is comfortably covered and perhaps provides for an acceleration should growth come though as envisaged, given an indicated strong order book, but that is purely a supposition on my part.

For now, broker Canaccord is looking for revenues this year of $129m with adjusted pre-tax profits of $12.1m giving EPS of 15c.

That sees the stock trading on a PE of circa 15, which given the solid balance sheet and medium to longer term growth prospects is perhaps worth my continued monitoring.

Last but not least, the company is set to change its group name to Nexteq, whilst still retaining the individual brands. I’m usually quite sceptical on such moves, as they often happen with companies looking to reinvent themselves.

That said, Jayal assures me that it will adequately reflect the whole offering, whilst allowing the various aspects to retain their identity.

There are some well-known Institutional holders on board, including Liontrust, Schroders, Chelverton and Octopus, whilst former execs from the early days still retain sizable stakes in the business.