Dialight (DIA) ... here we go again?

Wednesday 17th December 2014

I reckon Dialight is a grossly overvalued business. All I see is a business capitalised at £255 million, with little in the way of IP, and a dismal record of free cash flow generation. For example, on my calculations it achieved a free cash outflow of £4.6 million in 2013, as compared to a paltry free cash inflow of £2.5 million in 2012. More recently, its free cash outflow looks to have been a further £1.1 million in H1 2014. Other investors may be more enthused by this achievement or believe that there is some actual IP in the business and that it can be protected. Nonetheless ...

I have shorted the shares at 785p/shr as I reckon DIA is lining up to disappoint for the second year running to deliver a second win: Dialight ... a dimmer switch?. 

In its Interim Management Statement (IMS) from 7th November 2013, the group stated that:

"As in recent years, the Group's financial results are weighted to the second half, and in particular the seasonally-strong fourth quarter. As ever the precise timing of Industrial Lighting orders remains difficult to predict, although the Group continues to expect underlying profit before tax from continuing operations to be broadly in line with the prior year."

In the event, profit before tax (PBT) from continuing operations was £14.4 million to 31st December 2013 (2012: £19.7 million) or 27% below the prior year. 

The company warned with a trading update on 8th January 2014, where it stated that the miss was partly driven by:

"... The late receipt of almost £3m of Lighting orders that will now be delivered in 2014 and decisions by certain US customers in December to defer Lightning orders will result in a shortfall against our previous expectations."

A further £3 million in the revenue miss was attributable to the Traffic business:

"In addition, the combined performance of the Traffic business both in the USA and Europe was also down £3m in revenues on the prior year."

Skip forward to this year's IMS from 19th November 2014 and the group's perfunctory statement regarding second half (and in particular Q4) weighted lighting orders remains. But this time there is a slightly different caveat: 

"... While any further major unforeseen disruptions to production could result in additional slippage this year, we are encouraged that underlying market demand is strong and production is running smoothly at this time."

We've been down this road before and so I don't place much faith in the group's assurances and visibility of earnings. 

While the group's revenue has grown strongly over recent years, by 12% YOY in 2012, 14% YOY in 2013, and a consensus expectation of 17.4% YOY in 2014, its EBITDA margin has fallen sharply. DIA's EBITDA margin was 19.5% in 2012, and fell to 13.6% in 2013. It fell further in H1 2014, to 11.8% as compared to 12% in H1 2013. And yet despite this continued decline in EBITDA margin, full year consensus revenue and EBITDA forecasts imply an improvement in H2 2014, to 15.6% from 15.0% in H2 2013.  

I reckon a year on year margin improvement in H2 2014, to be very unlikely. So I sold short and will await a trading statement in early January 2015. One's thing's for sure. If DIA disappoints for a second consecutive year, then its 21x P/E rating is toast. 

Dialight consensus sales forecasts
Source: Bloomberg

Dialight consensus EBITDA forecasts
Source: Bloomberg

Dialight consensus EPS forecasts
Source: Bloomberg

Dialight consensus net debt forecasts
Source: Bloomberg

Dialight share price
Source: Bloomberg

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. 

Aberdeen Asset Management (ADN) ... taking the low road

Tuesday 9th December 2014

On the basis of a cursory glance of the price chart, you may reckon on Aberdeen Asset Management (ADN, mkt cap £6bn), having a third pop at 500p/shr. 

Aberdeen Asset Management share price
Source: Bloomberg

However, ADN's management can't put too much faith in this. They lobbed out over 3 million shares between them early last week. 

ADN Director sales after update
Source: Bloomberg

Indeed, approaching 500p/shr appears to have been the magic number to exit stage left over recent years. 

ADN director sales/purchases over recent years
Source: Bloomberg

Lastly, I'm minded to observe the CitiFX Emerging Market Carry Beta Index (CAFZBET4 Index). This leads me to believe that ADN is only going one way; perhaps 400p/shr for starters. So I sold short at 452p/shr.  

ADN as compared to CitiFX Emerging Market Beta Index
Source: Bloomberg

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. 

Barclays (BARC) ... stars aligning?

Tuesday 11th November 2014

Pursuant to an inspection of the Barclays (BARC LN) share chart, I bought a few November 245p calls for a penny. 

Over in the US, JP Morgan (JPM US), Goldman Sachs (GS US), Citigroup (C US) et al have rallied sharply over recent weeks. By contrast, the UK/Euro names remain in a funk. Relative valuations may pave the way for a sharp bounce in BARC. That said, this may have to wait for the forthcoming regulatory assault on December 16th 2014 when the Bank of England publishes the results of its stress test of the British banking system.   

Nonetheless, chart wise, I reckon this to be an interesting level on BARC; with the stars beginning to align. 

It's currently sat on its 200 day moving average, teasing to potentially break above this and out of its down channel; prevalent since July 2013. The nearer term moving averages are also beginning to turn up, with the prospect of a Golden Cross coming into play. 260p near term looks likely.  

While the UK banking scene continues to go through its trials and tribulations, in terms of current valuations, BARC is certainly the cheapest amongst its peers. It trades on a price to book value of 0.64x as compared to peers ranging from 0.82x (Citigroup) to 1.26x (Goldman Sachs & Lloyds). 

Similarly on a forward P/E basis, it's also the cheapest of the bunch. 

By contrast, it currently yields the highest dividend, whilst offering one of the highest prospective yields during the next few years.

Overall, any break higher may not come in time for November 21st, but November 245 calls at a penny were enticing enough to place a small wager on the technicals prompting a run up.   

BARC - share price
Source: Bloomberg

Barclays relative to Goldman Sachs
Source: Bloomberg

Barclays price to book relative to peers
Source: Bloomberg

Barclays forward P/E relative to peers
Source: Bloomberg

Barclays prospective dividend yield relative to peers
Source: Bloomberg

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. 

Avanti (AVN) ... questionable quality of sales

Wednesday, 5th November 2014

• 2014 revenue rose by $33.5 million. 
• 37% of this is related to sales of kit.
• 28% of this is related to sales where the full cash amount will not be recovered for five years.
• 65% of the 2014 sales increase appears to be related to kit sales and bandwidth or other whereby the full cash amount for the latter is unrecoverable for five years. 
• 48% of the original current trade receivables balance appears to be either provisioned as impaired or acknowledged to not be fully recoverable. 
• The group still plans to raise a further $125 million in debt and another $100 million in junior finance.

I remain short Avanti.


Avanti's 2014 accounts were released yesterday and while the group's year end statement (from September 15th 2014) revealed that debt continues to pile up at an alarming rate (the debt rises), the accounts show that the quality of its revenues remains questionable as ever. 

It had already been reported that 2014 revenue rose by $33.5 million (+104% YOY), to $65.6 million. However, the accounts reveal two noteworthy features in the composition of this revenue increase. 

• From note 2, page 53, it would appear that $12.5 million of the 2014 revenue increase of $33.5 million related to additional sales of terminals and other equipment. Hence, 37% of the increase in sales during 2014 did not relate to bandwidth but was in fact sales of kit.

Avanti revenue
Source: Note 2, 2014 Annual Report

• From note 16, page 59, it seems that $9.4 million of the group's $21.0 million trade receivables balance relates to a long term receivable, whereby just 10% of the original balance has been paid and the remaining payment cycle runs over the next five years until 2019!

Avanti trade receivables and long term receivable
Source: Note 16, 2014 Annual Report

This is altogether odd.

Firstly, one would assume that this long term receivable probably relates to the sale of bandwidth. If it doesn't then it would suggest that a further $10.4 million of the 2014 sales increase did not relate to bandwidth, which on top of the $12.5 million additional sales in kit would suggest that 68% of the group's 2014 sales increase did not relate to bandwidth. That would be strange for a satellite company.    

However, if it does relate to bandwidth sales, then that suggests that the group has extended a credit of $9.4 million to a customer(s) with a payment term over five years. Why would that be the case, when the company has suggested that capacity should be sold out well before 2019?

Further, this is not the first time that Avanti has extended a loan or in this case a credit to a customer. With this credit the group receives semi-annual instalments of $1.04 million, whereby interest is paid at a rate of 5.25% per annum. Incidentally, why does Avanti borrow its own debt at 10% per annum and then offer credit at 5.25% per annum? If you recall, in 2011, the group extended a £9.1 million loan to a re-seller/customer, or "strategic partner" as Avanti termed it then. That was supposed to accrue interest at a rate of 7% per annum, although within six months, the "strategic partner" had defaulted and Avanti took control of it (still a space oddity).

What this all suggests is that from the $33.5 million in additional sales for 2014, that $12.5 million relates to sales of kit and a further $9.4 million (which may or may not be bandwidth related) is from sales whereby the full cash amount will not be collected for another five years. This equates to 65% of the group's 2014 sales increase. 

In terms of the quality of the group's receivables balance, uncertainty remains. As highlighted above, $9.4 million of the total $21.0 million trade receivables balance is a long term receivable whereby the next instalment is due in June 2015. Why this is held in the current assets section is uncertain. Nonetheless, $9.4 million of the total trade receivable balance is naturally not going to be past due or even 60+ days past due as the first instalment isn't due for collection until June next year. This means that of the remaining $11.6 million in receivables ($21.0 million less $9.4 million in long term receivables) that $3.14 million is 60+ days past due. That is 27% of the current trade receivables balance is 60+ days past due. As Avanti has itself prior acknowledged, "Generally when the balance becomes more than 60 days past its due date it is considered that the amount will not be fully recoverable." 

Avanti - ageing of receivables
Source: Note 21 b, 2014 Annual Report

It is also worth bearing in mind that $4.6 million of the original $25.6 million trade receivables balance was impaired with a provision. So, of the $16.2 million in original current trade receivables, it would appear that $7.7 million has been provisioned for or is unlikely to be fully recoverable. That is 48% of the original current trade receivables balance!!! 

And another thing ...
Avanti paid its auditor, KMPG, an additional $392,000 in "Audit related assurance services" during 2014. Well done KMPG.

Avanti - auditor remuneration
Source: Note 4, 2014 Annual Report

I remain short Avanti.

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.