Dialight, former stock market darling, has another tough week but a recovery play?

On Wednesday, investors in FTSE main market listed Dialight (DIA) got another shock with a pretty dismal trading update.

“In our November Interim Management Statement, Dialight noted that the Group’s financial results for 2013 would be weighted towards the seasonally-strong fourth quarter, and that the precise timing of Industrial Lighting orders remained difficult to predict.

Industrial Lighting sales grew by 50% (£23m) in the year. 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 Lighting orders will result in a shortfall against our previous expectations.

We have previously stated that the performance of our Obstruction business during the year had been affected by the transition in our business model in this market and that this would directly impact Group revenues and profitability compared to 2012. In addition, the combined performance of the Traffic business in both the USA and Europe was also down £3m in revenues on the prior year. We now expect underlying profit before tax from continuing operations to be not less than £14.5m.”

The announcement has culminated in a long list of broken promises over the last 12 months.

A contrast to November when the company said “We are achieving order input in line with our previous guidance of flat revenues for the second half of 2013 compared to the second half of 2012. The performance of our components business is in line with previous guidance.”

The shares fell heavily in September to below £12 when they said “The delay in contract awards for Obstruction Systems means that the Group’s expectations for overall profitability are likely to be broadly in line with the prior year.”

The Cambridgeshire-based company specialises in placing beacons on telecoms masts and lighting for industrial sites has been a small cap share holders dream over the last 5 years, until trouble started striking in early 2013 with a series of profit warnings. The shares have risen from just over £1 five years ago to hit a peak of over £13 in 2012. They now stand at £7.21 after a 3% rebound on Friday on the thought that their dramatic fall from grace could make them appealing to a predator, but they still finished the week down 13% and are 32% down in the last year. On Wednesday the shares dropped 25% as the trading update spooked investors.

In the last FTSE reshuffle Dialight were demoted from the FTSE 250, with the management team seemingly losing their golden touch and unable to manage city expectations.

The company’s industrial lightings sales grew by 50% in 2013, 73% in 2012 and 127 per cent in 2011. The £14.5 million for 2013 is down from the profit of £19.6 million in 2012. It had previously estimated earnings to be in line with 2012.

The distribution model of its obstruction signals business, which provides illuminated beacons for towers on flight paths has been changed over the past year. It ended its distribution partnership model to move to a direct sales approach with the recruitment of 40 sales people and it is clear that this has had teething problems.

The company is bullish for 2014 and with around £3 million of orders seemingly being deferred into 2014 maybe there are better times around the corner for the company. “With the industrial lighting market remaining buoyant and Dialight continuing to hold its market-leading positions, the board remains confident of delivering renewed profitable growth in 2014 and beyond,” it said. The question for investors thinking about dipping a toe in the water now is, “do I believe you?”.

Pre-tax profits for 2014 are forecast to be around £22 million and with the shares down heavily, Dialight certainly starts looking interesting. With 32 million shares in issue, that makes it £0.69 earnings per share for 2014, putting the company on a p/e of 10.5 at the current £7.26 share price. It certainly could be a recovery play that’s for certain as long as management don’t deliver any more cock ups and get their house in order, particularly the obstruction signals sales force. It could of course be in the cross hairs of a potential acquirer given its market cap has now dropped to £235 million.

I do not hold shares in Dialight.

Contrarian Investor UK

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