Dialight: Turning around from a disastrous experiment

LED lighting solutions provider Dialight’s (LON:DIA) 2018 annual results released a few days ago seem to have hit the right chord with investors. The share price jumped by almost 7% on the day the results were announced and has been inching up since.

Clearly, investors are more impressed by the sharp 2.5x upturn in profit before tax (PBT) to £7.4m, than disappointed with a revenue decline of 6.6% to £170m and a net cash outflow of £2.9m. It is possible that they also noted the improvements at an operational level, with on time order delivery rising to 70% in 2018 from 48% in 2017.

Drastic steps towards turnaround

The steps towards improving company performance have not been without pain, however.

Dialight admits to 2018 being a “challenging year”, in which it terminated its relationship with its existing manufacturing partner and moved production back in-house. The company had first outsourced its manufacturing operations in 2016, but decided otherwise in the second half of 2018. However, some damage has already been done, visible in the fact that revenues have declined for two years straight.

Promising outlook

Nevertheless, all is hardly lost for Dialight. A look at its financial performance over the longer term suggests that there is much hope. Revenues showed steady increase in the two years prior to the outsourcing experiment. Further, there have been improvements in PBT over the past three years. In fact, there has been a turnaround from a loss in 2015 and 2016 over the next two years.

Dialight is also taking further steps to ensure operational efficiency in 2019 to 95%. To this extent, it has decided to setup new facilities in Mexico as well as in an as yet undecided location in Eastern Europe. It is also expanding its Malaysian facility this year. The company’s decision to expand its set of product offerings should also hold it in good stead, as should the management restructuring.

Too expensive

However, despite all the positive changes afoot, it is hard to overlook the fact that the company's shares are still quite expensive, with a price to earnings ratio at 24x, which is higher than that for all its peers. And this is despite that fact that its share is still trading at below both the one year and five year average levels at present by 16% and 43% respectively.

It is also worth noting that the share price has only been inching up in the past few days. If this trend continues, the stock will become even more expensive. While there is definitely promise in the company, its performance does leave much to be desired for now. Till the turnaround is complete, it might not be a bad idea to invest with caution.