Dialight growth portfolio candidate

Supplier of light emitting diode (LED) solutions for industrial users. Applying leading edge LED technology, it produces retro-fittable lighting fixtures designed specifically for hazardous locations, obstruction signals and traffic signalling.  I have no holding in this company (epic code: DIA). 

Market/Index	FTSE 250	Industry	Homebuilding & construction supplies
Sales	£115.1m	Earnings	£13.6m
Market Cap	£347.4m	Share Price	1075p
Norm. EPS	41.3p	Historic P/E	26.0
Est. 2013 growth	25.2%	Prospective P/E	20.8
Est. 2014 growth	27.9%	Prospective P/E	16.3
Rolling PEG	0.67	SGR	16.2%
PBV	5.5	Historic Yield	1.26%
ROE	22.8%	Operating Margin	17.0%
5 yr BV + Div return	19.5%	5 yr FCF return on BV	11.2%

Dialight is worth adding to a watch list of potential candidates for a growth portfolio.  It fails on my growth screens on 1 year relative strength, this is due to  confirmation in June that sales within their Signals division (41.8% of sales) will show a decline at the half-year compared to last year, although the Lighting division (39.5%) is expected to grow by over 50%. 

The problem in the Signals division is due to contract delays and, the change to direct selling in the US rather than through agents, which will take time to develop through the transition, but will ultimately provide better control and market intelligence.  These problems should be of a temporary nature, but due to the effect on the share price, offer the potential of building a stake in a company in an interesting market at a reasonable price.


Sales are through three divisions - Lighting, Signals and Components.  Lighting, provides energy efficient solutions for hazardous and non-hazardous industrial applications, through the use of high-brightness LEDs utilising a number of associated technologies.  Signals, supply high brightness LEDs for traffic, vehicle and obstruction signals.  Components, supply mainly to electronics OEMs for status indication and residual disconnect.  The share by divisional sales is detailed in the chart below:

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 North America is their largest market and they have manufacturing plants in North Carolina and in Mexico just 80 miles south of San Diego.  The territorial split of sales is shown in the chart below:

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The company's expertise covers such areas as thermal management, optics and electronic circuitry and their intellectual property (IP) is protected by patents - during 2012 they had 115 patents pending, 36 filed and 8 granted.  Their skill is in packaging a complete product that includes thermal heat-sinks, power supplies, LEDs, optics and lenses; assembled in low cost manufacturing plants in Mexico and Malaysia.

The lighting markets they address are substantial in size with the hazardous and heavy industrial installed base, their target market, estimated to be worth in excess of $10bn.  Sub-sectors within this addressable market are detailed in the chart below:




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Dialight has healthy operating margins of 17% and a ROE of almost 23% a result of their strong and increasing IP and investments in low cost manufacturing.  Investment in both of these areas along with increased working capital requirements did reduce free cash flow in 2012 below the prior year; a not uncommon theme in the odd year for fast growing companies.


The shares are not cheap at 26 times last year's earnings and almost 21 times this year, but they come with the prospect of escalating growth in a large market and they have some interesting technology that may be of interest to the larger participants within the industry.

Interims are to be announced tomorrow, with the expectation that Lighting will show growth of more than 50%, but Signals to show a decline, resulting in lower profits as they have also invested in their sales channels and increased their production resources.  Depending on the comments within their outlook statement for the remainder of the year, the share price may fall back again producing an opportunity for potential long-term investors to achieve an entry at a reasonable value.

The CEO has a little over 1% of the company and, with his shares worth almost £4m, ensures that he has the necessary incentive and "owner's eye" to improve shareholder value over the long haul.  I would judge Dialight to have a good narrow economic moat, due to their intellectual property and low manufacturing cost base.  Certainly one to watch.