Share of the week: It shoots the lights out

In a week when the FTSE 100 rose as much as 3.2% and the FTSE All-Share not much less, there have been plenty of big performances to choose from.

Royal Bank of Scotland brushed aside its Bank of England stress test failure and a possible multi-billion dollar subprime mortgage fine in 2017, rallying as much as 15%. Downtrodden ITV - one of our Dogs of the Footsie stocks - deserves a mention, too, after adding 10%.

Miners have also had a cracker, especially canny Glencore. It struck a deal with Qatar Investment Authority to buy a stake in Russia's Rosneft, which could generate hundreds of millions of pounds profit from oil trading rights.

There are others, too, but star prize this week goes to Dialight, up almost 17% in five days.

It certainly wouldn't win for length of its trading statement. Less than five weeks ago, the small-cap LED lighting technology firm used 35 words to tell us it was doing OK, and that volatile exchange rates would boost the top line.

This week, it spent twice as many words describing a "good November" and that, including currency benefits, bosses are now targeting an underlying operating profit for 2016 "materially ahead of expectations".

"Revenue expectations remain for a modest constant currency revenue performance, with reported revenue to benefit from a positive FX impact."

All this is a relief given Dialight has thrown resource at a new strategy "to fundamentally improve the group's operating model and thus position itself for long-term, sustainable growth".

Even analysts Michael Blogg and Chris Dyett at house broker Investec were surprised by progress. "We are raising our [below consensus] estimates for 2016e by over 20% while maintaining our prudent approach to later years," they said.

Operating profit forecasts for 2016 jump from £10.6 million to £13 million, equivalent to a 23% surge in adjusted pre-tax profit to £12.6 million, giving adjusted earnings per share (EPS) of 24.7p.

"End markets hold recovery and growth potential but it is mainly margin progress that drives this upgrade. Our valuation, based on the average EV/EBITDA ratios of lighting peers, also rises by 20% and we move back to 'buy' [from 'hold']."

However, they stick with already bullish estimates for 2017. Look for a 250-basis point improvement in operating profit margin to 9.7% next year, giving a pre-tax profit of £18 million - close to the record £19.5 million made in 2012 - and EPS of 35.2p.

The pair also raise their price target from 710p to 850p. At that price, Dialight would trade on over 24 times earnings estimates for 2017. That's eyewatering, yes, but not untypical.

"It is difficult to find UK Industrial stocks with Dialight's growth potential and the 'self-help' element of the investment proposition seems to be coming through well," add the analysts.

"We maintain an appropriate level of caution, in view of the limited visibility and the fundamental changes occurring at Dialight, but we are pleased with the latest update."

Final results for 2016 are out on 28 February.

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.