On 26th February, Zytronic issued a letter to shareholders outlining three key points:They were unable to find a buyer for the business as a going concern.

They have decided to proceed with liquidation.

The estimated liquidation outcome ranges from 46p to 60p per share, with the process expected to take around nine months.A circular will be sent to shareholders, and a special resolution must be passed for the company to officially delist. However, before this vote takes place, the company's shares will be suspended on 31st March because it will not meet the six-month deadline to publish its financial results for the year ending 30th September 2024. (As of now, we have not received any circular via e-mail.)

Liquidation Assessment

Given this context, we have conducted a liquidation analysis to compare against the valuation provided by FRP Advisory before the suspension deadline on Monday, 31st March 2025.

Cash Balance

As of 25th February 2025, the company's reported cash balance stands at £3.9 million, (up from £3.665 million on 31st of March 2024) which is equivalent to its current market capitalisation. No adjustments have been made to this figure, as expected costs will be accounted for separately.

Accounts Receivable

The most recent available figure for accounts receivable dates back to 31st March 2024. Given the time lag and the quality of receivables, we assume that 80% of this balance is collectable.On page 57 of the 2023 full annual report, the company provides more detail on the health of its receivables.

As of 30th September 2023, the company had £1.274m in receivables, of which £332k was written off due to two customer bankruptcies, £259k (20%) was overdue by more than 30 days, and £683k remained performing.This breakdown offers insight into the quality of the company's customers. Even without further bankruptcies, it would be reasonable to assume that around 20% of receivables may remain non-performing.

Inventories

Similarly, the latest inventory data is from 31st March 2024. Since most of this consists of raw materials and is recorded at the lower of cost or net realisable value, I have estimated that 65% of the inventory is recoverable.

Patents & Software

Zytronic has invested millions in patents and software over the years, which may still retain some residual value. As of 30th September 2023 (the most recent annual report), the net book value of these assets was £840,000, but I have conservatively estimated their worth at £100,000—equivalent to 12% of that figure.The company still holds over 15 patents, many of which provide intellectual protection and a competitive advantage in niche applications. While the patents may ultimately prove worthless, there is also a possibility they could be worth a few hundred thousand, making £100,000 a reasonable midpoint estimate.

Property Valuation

A comparable industrial property in the same area is valued at £4.25 million. Zytronic's Whitley Road property, while slightly smaller at 85,000 square feet compared to the 97,783 square feet of the comparable property, has additional office space and can be sold in sections, as it was originally acquired in pieces. These factors suggest that it should hold greater value.The total historical cost of the company's properties—including land, freehold, and leasehold—amounts to £5.8 million. A significant portion was acquired before 2008, with some purchases made during the financial crisis, when property values were relatively low.

While industrial properties do not appreciate at the same rate as residential real estate, if the company sells in an orderly manner, it is reasonable to expect a sale price in the range of £4.5 million to £5.5 million. However, this figure remains uncertain.

Plant & Machinery

As of 30th September 2023, the net book value of Zytronic's plant and machinery was £1.21 million. Given the specialised nature of the equipment, we have conservatively estimated a realisable liquidation value of £250,000.

Goodwill & Brand Value

Although the company's brand may hold some residual value, it is unlikely to generate any significant proceeds. For valuation purposes, we have assumed it will not contribute to the liquidation value.

Deductions & Costs

Operating Loss: Zytronic reported a pre-tax loss of £1.5 million for the most recent financial year (excluding any write-downs), which needs to be accounted for.

Exit Costs: The estimated cost of managing the liquidation process is £1.5 million.

Employee Redundancies: Assuming an average salary of £40,000 and a severance package equivalent to four months' pay, the total redundancy cost for 112 employees is estimated at £1.5 million.

The difference in cash between the last financial statement (31st March 2024) and 25th February 2025 is £245,000, which should be offset against another asset line. Since the specific line item is unknown, we have deducted it at the end.

Conclusion

Overall, the liquidation value estimated by FRP Advisory appears reasonable. The key variable in determining the final outcome is the property sale price. If the company is able to sell the property efficiently—ideally in separate pieces to maximise value—the upper end of the liquidation range could be achieved.

Why is There an Opportunity to Profit? Why is the Market Mispricing This?

The company is officially delisting from AIM to reduce costs. However, an additional, unstated motive may be to drive out investors who are unwilling or unable to hold an unquoted, illiquid stock.With the suspension date set for 31st March, there is a high probability of forced selling at depressed prices. Furthermore, many retail investors, particularly those using brokerage platforms that restrict or discourage holding unlisted shares, may feel compelled to sell at any price. This could lead to a temporary market dislocation, presenting an opportunity for buyers to acquire shares well below their intrinsic value.

Moreover, there is reason to believe that the officially stated liquidation range is conservative. If the actual liquidation value proves higher than the pessimistic scenario, the potential returns could be significant. Some well-informed shareholders may already recognise this and could be quietly accumulating shares, while others, deterred by the low official estimate, either avoid buying or sell at a discount.

This combination of panic-driven selling and the likely understatement of liquidation value creates a compelling opportunity for investors who can tolerate short-term illiquidity and take advantage of market inefficiencies.

Who Will Sell and Who Will Hold If the Company Delists?

Most institutional shareholders are brokerage firms, including Hargreaves Lansdown, Interactive Investor, Barclays, AJ Bell, and Halifax. These platforms will likely notify their clients about the delisting, emphasising the risks of holding unquoted shares. While investors are not required to sell, many retail shareholders tend to exit their positions following such announcements.

J Walter and Gavin Smith are expected to make independent, well-informed decisions. After speaking with J Walter, we believe he may even increase his position.

Henry Spain is also likely to hold onto its shares. The firm's lead portfolio manager, Glen Arnold, who has attended the Zytronic AGM with A.S., is a deep-value investor with experience in liquidations. Having written extensively on Warren Buffett (Trades, Portfolio) (Trades, Portfolio), he follows an investment strategy similar to Buffett's early approach.

Risks

• The most recent interim report is dated 31st March 2024, meaning the available financial information is nearly a year old. Some of the data is derived from the annual report, which is dated 30th September 2023, further outdated and less reliable.
• Additionally, major shareholders could oppose the delisting and subsequent liquidation, potentially altering the outcome.The liquidation process may take longer than expected, which could lead to higher ongoing operational losses and reduce the annualised return for shareholders.
• Finally, there is no certainty that the company's assets will be sold at their full market value, which could further impact the final payout.

Conclusion

Many investors feel uneasy about liquidation scenarios, particularly when a company is delisting. The lack of a readily tradable, quoted price, combined with the negative sentiment surrounding the process, often leads retail investors to sell based on emotion rather than reason. Most are unfamiliar with liquidations and may view them as excessively risky, resulting in forced selling at depressed prices. Additionally, with the company's valuation at only a few million pounds, sophisticated investors are unlikely to dedicate time to analysing this opportunity.

However, as illustrated in the outcome matrix, the annualised return across various scenarios remains compelling, making this an opportunity worth serious consideration. Having attended AGMs, A.S. has personally inspected the company's property, which appeared to be in good condition. Additionally, insights from an insider provide further confidence in the underlying asset value, reinforcing my margin of safety.

This niche area of investing is ideal for sophisticated investors who can take advantage of situations where others feel uncomfortable. Given the likelihood of forced selling, we recommend strategically accumulating shares at discounted prices.

P.S. This liquidation play serves as a hedge against market volatility and sentiment—an especially valuable feature in today's geopolitical climate, particularly in light of rising tariff tensions.

Disclaimer: This research is for informational purposes only and does not constitute financial advice, investment recommendations, or an offer to buy or sell any securities. The opinions expressed are based on analysis and publicly available information but may be subject to change. Investors should conduct their own due diligence and consider their financial situation before making any investment decisions. The author accepts no liability for any losses incurred as a result of reliance on this research.