Too early to buy Dialight

We knew these results were not going to illuminate the night sky following a profits warning issued last month, but even these first-half results managed to miss expectations and trigger another sell-off in Dialight shares. The LED lighting company has at least managed to strengthen its pipeline into the second half, and new boss Michael Sutsko has kicked off the customary strategic review of the business.

Excess costs caused by operational inefficiencies, lower lighting sales into the oil and gas sector, plus the deferral of a £2 million order hammered profits in the six months ended 30 June. So, despite 14% growth in revenue to £8.6 million, underlying operating profit crashed by three-quarters to £1.7 million, shrinking earnings per share (EPS) to just 5.4p.

At the main lighting division, sales were up by nearly a quarter to £53.4 million but profit halved to £3.5 million. The smaller signals division made 79% less than last year and losses at the components segment grew to £500,000. In poor shape, and with a switch from net cash to £8 million of net debt, the half-year dividend is axed.

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It's the second slug of bad news overseen by Sutsko since he took the helm at Dialight eight weeks ago. Ten days into the job he issued a savage profits warning, which wiped out over a third of the company's value. It remains to be seen what an urgent strategic review of the business unearths. Operations, the supply chain and product development are all under scrutiny.

We'll find out more in the autumn, but we do know that management is already streamlining the business, which they hope will transform operations in the next 12-18 months. Mexican operations have been relocated to offset poor platform product design, manufacturing and global commodity management. Getting this back on line should be a priority.

"We would anticipate the review to confirm the industrial and hazardous LED lighting market potential and identify which other markets have attractive growth opportunities. The group's product portfolio will be reviewed for non-performance and appropriate action will be undertaken," reassured Sutsko.

Investec Securities has pulled its estimates and put its valuation under review. After slumping as much as 18% to 451p on Monday, Dialight shares trade on 16 times Investec's most recent forecasts.

"We expect consensus expectations to be reduced today (we were at the bottom of the range) as a result of the H1 outturn and adverse currency movements," says Investec analyst Michael Blogg." It feels too early to buy aggressively into weakness, notwithstanding the backdrop of strong growth in Dialight’s main end markets."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.