Hope everyone has a nice weekend!
SHARE PRICE: £6.82 (DOWN 16%)
Dialight is on the wrong end of the stick this morning with the shares down 16% (as of 9 am).
Their trading update was short as management stated that: “Due to short-term production challenges, we now expect EBIT for the year ending 31 December 2017 to be in the range of £13.5m to £15.5m.”
But they have made significant technology upgrades in their two largest product lines: Area Light and High Bay.
Going back to their full-year results, Dialight saw no improvements in unadjusted EBIT. Operating profit came in at £13.1m, but the exceptional costs caused an operating loss of £3.3m.
Maybe, short-term production challenges are code for “expect a big write-down.”
It has recently regained their sales level that was last seen in the early 2000s. That’s because it disposed of Roxboro Group back in 2005.
If you assess their historical profits and free cash flow trend, using 3-year average, then Dialight is a cylindrical business.
Balance sheet and cash flow
Good to see it has zero borrowings, which leaves them with net funds of £8m. Although peak funds were £15m in 2013.
Unfortunately, it has stopped paying dividends.
Market capitalisation four-times higher
If we are going to compare apples to apples, we got to look at profit earnings back in their heydeys and compare it today by averaging out earnings over a decent period.
Investors may not realise this, but between 2000 and 2004, their average market capitalisation was £50m when average profit was £10.5m.
Contrast this to the past four years, their average market capitalisation is £230m with an average profit of £3.5m.
So, between 2000-04, Dialight average PER is 5 times, whereas 2012-2016 gives a PER of 75 times.
According to Investec, N+1 Singer and Peel Hunt, all three are forecasting turnover to grow from £180m to £220m by 2019.
Meanwhile, they see pre-tax profits rising from £10m to between £30m and £40m.
And finally, they envisage EPS rising to 80 pence from the current normalised EPS of 30 pence.
Are their truths in these forecasts?
One reason for the shares to rise is down to the weak pound because 94% of their businesses are overseas. The shares recovered from £4 to £10, before declining back to £7.
Another reason for the rise is President Trump because of his pledge to rebuilt America infrastructure. So far this fails to materialise, as his presidency is marred by media outrage of what’s coming out of his twitter accounts.
Shares in Dialight were £13 back in 2013. Now, Dialight can no longer rely on the weak pound to boost revenue and profits. Unless the British Pound somehow finds itself facing parity with the US Dollar. Also, I can’t give the thumbs up on brokers forecast because the management has stated short-term disruption and it usually means lower than expected earnings. Therefore, the company is a hold at best.
SHARE PRICE: £0.84 (up 3%)
First, Q1 results were mixed as production is down by 4% from same period last year. Although it maintains full-year guidance of 5Mct.
Meanwhile, revenue was down 17% due to the Williamson mine not being allowed to export. Although this problem is resolved with the Tanzania government.
The company continues to face falling diamond prices. In Q1, it was down 3% compared with second-half 2017. Also, net debt increased to $613m from $555m.
Their full-year results saw it mined 3.7mct of diamonds from 19mt of ore. They have 47.9mct of reserves and 312mct of resources.
Revenue was up 1% to $431m, but the translation back to British Pounds saw sales increase to 30%.
However, profits were down last year due to a labour dispute and Tanzania export ban.
In the Long-Run
Petra Diamonds is a young business as it started pouring out real diamonds back in 2008. Back then the company was valued at £100m and the shares rose as high as £1bn before dropping to £435m.
Over this period, things aren’t rosy due in the perspective of positive cash flow generation. It saw mostly negative FCFs and the occasional positive FCFs.
If you measure FCFs accumulatively, then the last eight years has created negative cash outflow of £550m.
This is a result of having to consistently invest in capex to expand mining production. The annual capex grew from £10m to over £220m in that period.
With huge cash outflow, it couldn’t pay out dividends for shareholders. In fact, to sustain this growth it requires net borrowing rising to over $613m or £471m.
Rising Capital Employed and Maintenance Costs
The increase in capital spending has brought with it other problems. Rising capital employed is needed to generate sales. The level has risen from £103m to £1.3bn since 2008. Meanwhile, sales rose by £38m to £380m, a less than substantial percentage increase.
Also, the increase in assets means depreciation and amortisation expenses is very rising each year.
This means assets are getting too large and is inefficient to generate the level of sales and grow profits to keep up with asset growth.
It is hard to place a value on mining companies when external factors disrupt their operational and affect their results. And given they operate in a higher geopolitical risk area, it’s a hard to put a valuation on this miner.
I’m not a fan of the mining sector because of their cylindrical nature, where low PER means slow growth, not great value. Whereas, high PER means high growth and an expensive valuation.
However, I’m not against the mining sector completely, when I speculated in Ascent Resources and sold close to their peak at 8p. A pure speculative return! But, I missed out on Anglo American, despite it being a large miner with a share price decline resembling of a junior miner.
However, the mining sector has risen since their lows in 2016.
For Petra Diamonds, there aren’t enough positive factors for me to recommend a buy. The biggest problem is rising net borrowing and a negative free cash flow, which is widening every year.
Here’s a thought. Petra Diamonds market capitalisation is around £430m, but their enterprise value is close to record highs.
For me, I wouldn’t be investing given the risk of debt spiralling out of control and geopolitical risks.
Braemar Shipping Services (BMS)
SHARE PRICE: £2.93 (down 3.2%)
Management has stated it has seen an improvement in operations after a challenging year. However, if you look at each of their division you get this:
–Shipbroking; – revenue down slightly, with underlying operating profit down to £3.5m from £4m.
–Technical; – revenue decreases by £1.9m with underlying operating loss improving slightly to £0.4m.
–Logistics saw revenue down £1.3m and underlying operating profit of £0.6m.
Net profit is down £53,000 from £113,000. Forex has cost the company £2.7m.
While the company has said net funds rose to £6m, this is below their net fund’s position of between £20m and £30m during the periods from 2008 to 2013.
The transportation of goods and services depends on world trade and supply of shipping cargoes. Anyone who is familiar with the Baltic dry index knows what I’m talking about. Although the Baltic Dry has recovered from the lows $300 to $1,500, this helps Braemar Shipping to gain more in fees.
However, the historical long-term of Braemar Shipping isn’t good.
First, we start with falling EBIT margin against earnings yield.
The decline in competitive advantage is very pronounced.
Second, their debtors and creditors are closed to all-time highs, in proportion to revenue.
Third, Braemar Shipping has seen productivity decline based on the number of employees.
All this leads to the conclusion that Braemar Shipping is in a high competitor sector. This puts pressure on Braemar to make drastic costs savings to generate a profit.
Acquisition of NAVES Corporate Finance
Below are details of their latest acquisitions:
It bought NAVES Corporate Finance GmbH for €24.00 million, rising to a maximum of €35.00 million should earn-out payment terms and conditions be satisfied.
€19.00 million, to be satisfied 50 percent. in cash and 50 percent. in Convertible Loan Notes. Of which, €14.80 million will be payable on Completion, followed by three equal annual instalments of €1.40 million.
Bonus payments of up to a further €11.00 million may be payable to Management Sellers over a three-year period pursuant to a performance-based earn-out which will be satisfied wholly in Convertible Loan Notes.
NAVES generated revenue and profit after tax for the year ended 31 December 2016 of €7.46 million and €2.13 million respectively.
With a cylindrical business like Braemar, the best indicator is to average PER and EV/EBIT over a three-year period.
That’s telling us PE and EV/EBIT valuation are sky-high. That’s no surprise because of weaker earnings.
Or, it could indicate higher growth ahead. Brokers are seeing higher EPS in the next two years, but back to levels in 2014/15.
Braemar Shipping Services depends on the economies of the world major economy like China, Germany and the US. Right now, America has a US president that is against free trade unless it benefits them.
This makes me a bit pessimistic about the industrial shipping industry and why I think high PER is just that: expensive.
Not a stock for me.
Thanks for reading today analysis. I’m a bit late.
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The above analysis is based on my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability. I don’t hold the company’s shares unless stated.