Matrix initiates research on Dialight

Date Announced: 01 Mar 2011

Matrix initiate with a BUY rating and 800p price target. Following a successful 2010 Matrix believe there remains material upside as Dialight enters what they forecast will be a period of sustained revenue and earnings growth. The key drivers are international expansion of sales of proven products, strong end-market demand, particularly for its signals and illumination products, first-mover and regulatory advantages in key markets and continued margin-supporting product development.

Dialight is headquartered in the UK and operates out of offices in the US, Denmark, Germany and Mexico. Dialight's LED products, when compared to traditional non-LED alternatives, reduce maintenance expenses, improve safety and are more environmentally friendly
While the shares have rerated following a successful 2010, we believe there remains material upside as Dialight enters what we forecast will be a period of sustained revenue and earnings growth. The key drivers in our view are international sales expansion, strong end-market demand, particularly for Dialight's industrial and obstruction lighting products, first-mover and regulatory advantages in key markets and continued margin-supporting product development. We initiate coverage with a BUY rating and 800p price target.

• More growth to come - initiate with a BUY rating: We forecast group revenues to grow by 66% to £165m by 2014 with EBIT rising by 107%, reaching £23.4m at a 14% margin. With cash flow from operations outstripping capex requirements, we forecast equity free cash flow to rise to £15.9m by 2014 from £5.7m in 2010. This strong cash generation drives net cash to £48m at end-2014, providing the group with the financial flexibility to expand production or make strategic acquisitions and prompts our 2014 dividend forecast of 15p per share, up 88% on 2010.
• Industrial lighting growth. We believe this segment's 111% top-line growth in 2010 is the beginning of a sustained growth phase, driven by a burgeoning sales pipeline, new product development facilitating new market entries and international expansion. We are forecasting triple-digit top-line growth in 2011 and 50% growth in 2012, driving a segment result of £4m by 2013E.
• Obstruction lighting growth. We are forecasting 40% top-line growth in 2011 for this segment and a further 30% in 2012, driving 121% growth in the segment result through to 2012E at a sustainable 62% contribution margin, as sales into the US communications tower market and the wind turbine sector increase.
• Transitioning customers from trial to volume - The average order size of the 300 industrial lighting customers in 2010 was just 15 units, indicating that the bulk were still in the initial testing phase. Converting these accounts into bulk orders will be the key growth driver for this business.
• Our target price of 800p is based on a 10% discount to our 10-year DCF model, which uses a 9% cost of capital and a 3% long-term growth rate. The full DCF valuation and sensitivity analysis is produced in the valuation section of this report.
• Key risks to our investment case. LED pricing increases or tighten of supply could drive margin contraction. The political situation in Mexico could impact manufacturing.
Full research note (19 pages) avilable here: http://web.matrixgroup.eu/FS/1312/Documents/Dialight%2028.02.11.pdf



Contact
Tom Plinston +44 20 3206 7250 Michael McNamara +44 20 3206 7149 michael.mcnamara@matrixgroup.co.uk

E-mail:tom.plinston@matrixgroup.co.uk

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