Noise and Dialight (DIA) ... wimps & romantics

Friday 30th October 2015

My inbox coughed up a "Conviction List Update". Its content issued from some of the finest, indefatigable minds in broker land. 

Having read the word conviction, I reckoned on the substance being top notch. Sure things. Bullish patterns. Great numbers. Super-fired. Plenty room for upside. Coiled and ready for a big move up. 

The sky is the limit. 

Hands beginning to shake I carefully placed my cup of tea back on its coaster. 

And there it was. The fool proof ideas I never knew I needed.

"Just Eat & Trinity Mirror In. Chemring out." 

Hang on a sec. Chemring out?

Chemring had a profit warning on Monday. Its stock's dropped 24% since. 

That's some conviction. 

Where was the courage in this list of conviction? The strength in the face of pain and grief? 

And good grief, 24% was plenty of pain. 

I picked my cup of tea back up and turned my attention to Dialight. 

Dialight

Dialight share price
Source: Bloomberg

On Wednesday, Investec was the latest broker to savagely cut its earnings forecasts for Dialight. This came after Tuesday's severe mauling by DIA's house broker, Canaccord. 

Canaccord cut its operating profit forecast by 62% to £6 million for 2015. 2016's operating profit forecast was reduced 43% to £10.5 million. The lighting segment was expected to see no revenue growth in H2 2015, and bounce back by 15% in 2016. That's some bounce. 

Investec was less touchy feely. It cut its 2015 EPS forecast by 73% to 4.8p/shr (implying a loss in H2) and its 2016 EPS forecast by 50% to 16.1p/shr.  

Investec's numbers would put the stock on 114x 2015 forecast EPS and 34x 2016 forecast EPS. 

Miraculously, Investec left DIA on a "Hold" rating. 

They all have "Buys" or "Holds". It's no mystery behind the romancing. 

Whatever the recommendations, consensus earnings forecasts likely still need to go lower. According to Bloomberg, two analysts in that consensus are still in the fantasy section of broker land, one plumping for 16.6p the other 20p of earnings for 2015 and then 29.9p and 31p of earnings for 2016. 

They must be taking long vacations.  

Dialight semi-annual EPS and implied H2 2015E EPS from consensus forecast
and H2 EPS as multiple of H1 EPS
Prior to 27th October 2015 strategic review and trading update
Source: DIA interim and annual reports, Bloomberg

Dialight semi-annual EPS and implied H2 2015E EPS from consensus forecast
and H2 EPS as multiple of H1 EPS
After the 27th October 2015 strategic review and trading update
Source: DIA interim and annual reports, Bloomberg

And another thing

During the years since DIA's earnings grew from 23.2p per share in 2010, to 36.4p per share in 2014, I calculate that the group achieved a somewhat lowly average of £1.8 million per annum in free cash flow. 

The group's net cash position has dwindled from £10.4 million in 2010 and a peak of £15 million in 2012, to a net debt position of £8 million to 30th June 2015. 

Quite what the FCF and net debt profile will look like over the next year or so against the backdrop of the planned realignment is uncertain. But I would reckon a £179 million market capitalisation appears somewhat lofty in the context of the group's record of FCF generation and the way consensus appears to be heading.   

No position Chemring. 

No position Trinity Mirror. 

I'm short Just Eat. 

I'm short Dialight. 

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.