Dialight (DIA) ... a dimmer switch?

Monday 21st October 2013

I sold short in Dialight (DIA LN) at 1,196p/shr on Friday. I reckon even after its recent profit warning that the chances of DIA achieving its FY 2013 consensus forecasts are slim to none. 

At Friday’s close of 1,207p/shr, DIA is capitalised at £386m. This appears a rich valuation for a company which has never generated more than £7m in free cash flow (FCF) in any one year; that is as far back as I can see which was to 2007. In fact it only achieved £2.5m in FCF during FY2012. Further it has a tangible net asset value (TNAV) of less than £46m, which corresponds to 139p/shr, or 12% of Friday’s close.

One argument for such a rich valuation may be that it is perceived to be a growth company. Earnings grew by 34% YOY during 2012, however, Bloomberg consensus has EPS growth slowing to just 8% YOY, for FY 2013. So not much growth this year, although improvement is expected next year, with consensus projecting FY 2014 EPS growth rebounding to 41% YOY. As such, the shares trade on 26.6x this year’s earnings, falling to 18.9x next year’s on a P/E basis.

I reckon this year’s out-turn will be considerably worse than consensus projects. As recently as 12th September, DIA warned that “... the Group’s expectations for overall profitability are likely to be broadly in line with the prior year.”

Bloomberg consensus has 20.2% YOY revenue growth to £138.4m (2012: £115.1m) pencilled for FY 2013. Moreover, consensus projects FY 2013 EBITDA to be £24.1m (2012: £22.5m). This implies a FY 2013 EBITDA margin of 20.8% (2012: 19.5%).

When considering the revenue slowdown and the drop in EBITDA margin during H1 2013, then this leaves an awful lot of work to do to achieve FY consensus. Revenue growth was 12.8% YOY during H1, so that H1 2013 revenue rose to £59.9m (H1 2012: £53.1m). If the above £138.4m in revenue is to be achieved for FY 2013, then this implies that H2 2013 revenue needs to grow by 26.6% YOY, to £78.5m (H2 2012: £62.0m). I.e. revenue growth is required to be more than twice that in H1.

The group’s EBITDA margin slipped to 11.4% during H1 2013, from 20.8% in H2 2012 and 18.1% in H1 2012 (FY 2012: 19.5%). For DIA to meet consensus forecast of £24.1m in EBITDA for FY 2013, then this suggests that the group needs to achieve £17.3m in EBITDA during H2 2013 as compared to £6.8m during H1. This implies the EBITDA margin needs to rise to 22.0% during H2 2013 up from 11.4% during H1 2013; i.e. nearly twice the margin of H1.

I stand to be corrected, but I reckon that all this appears a tall order and even if achieved, would only be sufficient to meet what is supposedly priced in for FY 2013. Further, should revenue grow during H2 at the same pace as that during H1, and the H2 margin be unchanged from that of H1, then FY 2013 revenue would be £129.9m and EBITDA £14.7m. That suggests revenue being 6% below consensus and EBITDA being 39% lower than expectations.

DIA has a growth rating. DIA’s earnings are now not growing all that quickly. Something has to give. I suspect it’s the former.

Dialight: semi-annual revenue and EBITDA
and implied H2 2013E revenue and EBITDA from consensus forecast
Source: DIA interim and annual reports, Bloomberg consensus

Dialight: semi-annual revenue growth (%YOY) and EBITDA margin (%)
and implied H2 2013E revenue growth and EBITDA margin from consensus forecast
Source: DIA interim and annual reports, Bloomberg consensus

DIA share price
Source: Bloomberg

DIA consensus FY 2013E EPS forecast
Source: Bloomberg

DIA consensus FY 2014E EPS forecast - also slip sliding
Source: Bloomberg

DIA forward P/E and EV/EBITDA rating
Source: Bloomberg

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