Thursday 30 July 2015

Dialight (DIA) ... three years in a row?

Thursday 30th July 2015

For the third consecutive year, I reckon Dialight has zero prospect of achieving full year consensus forecasts - even though they have already been sharply reduced on the back of this week's interims. 

And here's why ...

Bloomberg consensus envisages 8% YOY revenue growth to £173 million (2014: £160 million) for FY 2015. Moreover, consensus projects FY 2015 EBITDA to be £18 million (2014: £22.9 million). This implies a FY 2015 EBITDA margin of 10.4%. 

Dialight: semi-annual revenue and EBITDA
and implied H2 2015E revenue and EBITDA from consensus forecast
Source: DIA interim and annual reports, Bloomberg consensus
When considering the revenue slowdown and the sharp decline in EBITDA margin during H1 2015, then as per usual, this leaves a helluva lot of work to achieve FY consensus. Revenue growth was 13.7% YOY during H1 2015. Full year consensus implies H2 2015 revenue growth of 3.8% YOY. This is probably about right. However ...

The group's EBITDA margin dropped to its lowest level in six years during H1 2015; to 5.6% from 11.8% in H1 2014. For DIA to meet consensus forecast of £18 million in EBITDA for FY 2015, then this suggests that the group's EBITDA margin needs to rise back to 14.6% during H2 2015; or nearly 3x the level achieved during the first half. 

Dialight semi-annual revenue growth (%YOY) and EBITDA margin (%)
and implied H2 2015E revenue growth and EBITDA margin from consensus forecast
Source: DIA interim and annual reports, Bloomberg consensus
In terms of FY 2015 consensus EPS projections, then these look even further stretched. DIA reported 5.4 pence per share of EPS during H1 2015. Full year 2015 consensus expects 23 pence per share. This implies over a threefold increase of first half EPS during the second half; or 17.6pps in H2 2015. Second half earnings have historically been weighted and stronger than first half, but even so, over the past six years they have averaged 1.5 x higher than first half EPS ... not 3.2 x.     

On the basis of DIA's second half earnings rising inline with the historical 1.5 x uplift over first half earnings, that would suggest H2 2015 EPS of 8.1pps, or 13.5pps for FY 2015.

Dialight semi-annual EPS and implied H2 2015E EPS from consensus forecast
and H2 EPS as multiple of H1 EPS
Source: DIA interim and annual reports, Bloomberg consensus
A 13.5pps FY 2015 EPS outturn, would imply the shares are trading on 38x earnings. I reckon 20x would be generous, which implies a share price closer to 270p/shr. 

Dialight forward P/E and EV/EBITDA rating
Source: Bloomberg consensus
Dialight share price
Source: Bloomberg
I remain short. 

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1 comment:

  1. The shares are on a tear recently. I could not find any indication why (okay, 1 broker upgrade). Operationally, I cannot imagine that operations improved meaningfully over the last months. The company is now back on 3x P/B and 30x 2015 earnings. Earnings which are not likely to be met. I sold some more.

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