Dialight LED lighting share price dives into dark, opportunity?

Dialight (DIA LN) share price is down a third YTD
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The story: Dialight (DIA LN), is a small manufacturer making LED lighting for hazardous environments. It used to be priced as a high-growth story, on a P/E in high 20s, when revenue growth hit a speed-bump and management issued a profit warning. Market panicked with share price losing 40% in a single day. However fundamentals remain robust and the business is still in a good shape. I believe Dialight is a bright story deserving some more light

Current Valuation
Share Price : 5.38 Market cap GBP 172m
Dividend Yield 2.8% P/E x18, P/BV x12, P/BV x2.4 Operating profit margin 10%, ROA 9%

Business: Dialight manufactures LED lighting for use in hazardous industrial locations. These lights are used on top of telephone towers, wind turbines, oil & gas plants.
LED lamps comparing typical ‘incandescent lamps’ or ‘fluorescent lamps’ have longer life span and are more energy efficient, analysts project LED lamp market to grow more than 10fold over the next 10 years.
Revenue:  The main segment is Lighting, contributing 52% of total revenue,Signals make 31% and Components 15%. In 2014 revenue grew 46%, driven by stronger volume +40% and improved pricing. In 2014 sold 287,000 lighting units, on average selling price GBP 348.
Market: Dialight sells to industries operating in mining, food & beverage, power generation, oil & gas, petrochems. LED lighting solutions although are more expensive, have a longer life expectancy (15-20 years) and consume on average 50% less energy.
Profit warning  On 10/6 management announced although Q1 exceeded expectations, they’ve noticed a slowdown in new orders, as a results first half revenue and profits will be lower than last year and well below consensus. The newly appointed CEO Michael Sutsko hired an army of consultants to review operating procedures and find opportunities for cost cutting.
Investec broker forecasts a 9% increase in revenue for this year, a 25% drop in profits and a stable dividend, with revenue and profits picking up there-after, indicating this profit warning was only a temporary speed-bump.
In the call, management talked about order delays int the oil&gas clients, as they slash CAPEX seeing lighting infrastructure upgrades as a second priority. I think other end-markets like food and beverage, power plants and infrastructure could help to replenish the order-book. The value proposition for energy saving using LED technology is still intact, enabling DIA LN to find clients in different end-markets
Balance sheet: Dialight has a robust balance sheet, with net cash GBP 0.6m and minimal debt, inventory cycle of 100 days and average debtor days 78.
Free cashflow: Even though Dialight is on expansion mode, increasing capacity last year generated GBP 1.4m freecash flow, as it generated GBP 8.6m in operating cashflows and spent 7.2m of it investing in new capacity.

Peers: Since the profit warning Dialight trades on average 25% lower P/E and EV/EBITDA comparing to similar companies like FW Thorpe (TFW LN), Halma (HLMA LN), LSI (LYTS US), Cree (CREE US), SPX (SPW GR)

Take over target: LED lighting business is in consolidation, as big players like Osram aim to increase market share. In fact Osram acquired Encelium and Acquity bought Pathway. Dialgiht could be an attractive M&A target as apotential buyer, at today’s valuation on EV/EBIT x9 could lock a yield of at least 9%, getting “for free” all the potential growth in the LED market. For us who haven’t got handy GBP 175m to buy-out DIA LN, we can lock a 2.8% divi and hopefully some price appreciation as the LED market pricks up.dia bq

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