Is Dialight’s market valuation shining too bright?

Dialight PLC (Electronic & Electrical Equipment, FTSE SmallCap)  

Market Admission Date: – 09/11/93.

Market Type: – Main Market.

Brief Background

Dialight PLC specialises in Light-Emitting Diode (LEDs)  for hazardous locations. The business was founded back in 1938, it started as a producer of instrument panel light for aircraft and motor vehicles. By 1971, it enters the LED space and soon became a world leader. 

 

Company’s Fundamentals

From first glance, Dialight’s fundamentals are not terrific. It is not a growth business, how should you interpret Dialight PLC’s financial information?

Fundamentals Dialight

Dialight’s sales and earnings have fallen short against market valuation with sales growing by 4.2% in 15 years. Meanwhile, operating profits declined by 78% in that same period. 

Debt elimination is a positive step and may have played a role in boosting shareholders’ equity to £77.2m.

On Dialight’s cash statement, we can observe that operating cash flow grew by 28%, but free cash flow is up by 57.7%. The company no longer requires external financing as it pays off borrowings.

 

 

Financial Ratios

Given that it was making losses, it is unsurprising to see the company produce low returns.

On its operations, Dialight is struggling to turn over its inventory, as the pace slows to 3.7 times. (It also contributes to the company declining margins). Receivables turnover is okay but close to its lower range meaning credit customers are taking longer to pay off debt to the company.

 

One thing Dialight isn’t is becoming insolvent. Because real net cash (defined as cash plus receivables minus total debt minus payables) is £16.7m. Operating cash flow covers 44% of the company’s current liabilities. Similarly, operating profits comfortably covers net interest costs at 6.6X.

 

 

Cash margins look decent. But refer back to the absolute numbers in the cash flow statement. For example, a £10m operating cash flow is a bad margin when revenue is £500m, giving it a 2% margin. But a lower cash operating profit of £2m with sales of £10m make cash operating margin looks good at 20%. In Dialight’s case, it is not the margin but the absolute result that is important, especially in proportion to its market valuation. 

Market Metrics

Onto its market metrics, Dialight PLC performed well for its shareholder as the share price rose by 837% since 2001. As the number of shares in issued fell from 56.75m to 32.52m, then market valuation is only 437% higher.

Still, this is far ahead of its fundamentals.

Meaning every Dialight’s market metrics is probably valued far ahead of itself. For example, Price to equity is coming in at 4.51X, whereas in 2001 it was 1.09X.

Even on their cash flow metrics, it is to 20X on an EV/CASH FLOW Ratio.

Management Watch

To be fair and honest, management did deliver on market returns to shareholders, despite the company’s fundamentals showing no improvement since 2001. 

Management Dialight

 

Final Thoughts

At £347m, Dialight’s market valuation is ahead of itself, but we don’t know how far this rally is going to run. In my opinion, there is a great risk investing at this valuation because the latest results do not reflect the company’s valuation.  

As always, please do further research. 

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