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THE BUSINESS

Founded in 1938, Dialight specialises in the production of lighting technology based around light emitting diodes (LED) – devices which convert electrical energy directly into illumination of a single colour. Compared to normal bulbs, which require a filament to be heated up to produce light LEDs rely on semiconductor technology generating much less heat and achieving energy savings.


The firm has had an interesting corporate history, with it becoming part of North American based Phillips in 1963. In 1990 a management buyout saw it and other companies become part of UK-based multinational Roxboro Group, which listed on the LSE in 1993. Twelve years later, the Roxboro Group decided to sell off one of its main subsidiaries, analytical equipment manufacturer Solartron, to Ametek for GBP42.1 million in order to focus on applications revolving around LEDs. As part of the deal cash was returned to shareholders and a new company, Dialight, was formed.


As of today Dialight’s strategy revolves around identifying niche markets for LED applications. By focusing on regulated markets the company avoids competing against inferior or low-grade products. Its unique selling point involves it offering low-maintenance lighting products that deliver electricity savings and which also help companies reduce their carbon footprint.


The company currently trades through two divisions. The first, Signals/Illumination, is involved in the production of traffic and rail signals, obstruction lights (lighting devices that mark out tall buildings such as airport control towers and mobile phone towers) and solid state lights (low-energy lighting technology). The division accounted for 56% of group revenues in the last financial year (to 31st December 2008) and applications of its technology include shock-resistant, rain-damage proof lighting systems installed on bridges and inside tunnels. One of the division’s major projects involved the fitting of lighting facilities on an oil rig run by North America’s largest refinery, Valero, under which it helped cut the company’s energy consumption and enabled it to reduce its total lighting fixtures by 50%.


Dialight’s second division, Components, produces indicator lights supplied under Original Equipment Manufacturer agreements. The firm’s indicator lights are found in switches and buttons in dash- board panels, aeroplane cockpits and a variety of electrical circuits. The unit also produces Electromagnetic Disconnects, which are switches used by utility companies to manage electrical supply to homes and businesses. One of the main products in the division is the patented 200 amp Disconnect Switch that enables current switching and is resistant to short-circuit conditions.


The firm’s primary operations are in North America, with the region contributing 65% of revenues in the last financial year. The next most important geographic segment is the UK, which was respon- sible for 12.5% of turnover, while the remainder is split almost equally among the Rest of Europe and Rest of World segments. Dialight holds 7 patents, has filed 13 others and has a further 72 patents pending for various technologies.

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MANAGEMENT

Chairman, Harry Tee CBE, founded the Roxboro Group in 1990. Prior to forming the company he was a main board director at Graseby and has also held management positions in oil and gas services provider Schlumberger and multinational engineering company ITT. Tee is also Chairman of Scientific Digital Imaging, Piezotag Ltd and The Electronics Leadership Council and serves as a director of manufacturing and engineering sector skills coun- cil SEMTA. In 2008, he received a CBE in the queen’s Birthday Honours List for services to the electronics industry. In the 2008 financial year he was paid a salary of GBP75,000 and at the previous year-end held 4.7% of the company’s shares.


Roy Burton took over as the company’s Chief Executive in September 2005. He began his career with Philips Electronics and has also worked at ITT and electrical components manufac- turer Amphenol Corporation. In 1994, he was appointed Group President, Electronics, at Memphis-based Thomas and Betts Corporation and served as the CEO of Coraza Systems before joining Dialight. In the previous financial year, Mr Burton drew a salary of GBP231,000 and received taxable benefits of GBP4,000 and a bonus of GBP107,000.


The company’s Finance Director is Cathryn Buckley, who joined the Roxboro Group in 1999 as Company Secretary. In September 2005 she was appointed to her current position. Before joining the company she worked with KPMG where she qualified as an accountant and spent 12 years. Buckley earned a salary of GBP139,000 in the year to 31st December 2008 and a bonus of GBP47,000 and taxable benefits of GBP17,000.

CURRENT TRADING

Interim results, to 30th June 2009, reflected a steady performance in a difficult market. For the period the company reported flat sales of GBP34.6 million and a 75.3% fall in pre-tax profits to GBP529,000. Had it not been for the strengthening of the US Dollar against Sterling revenues would have come in at GBP28.2 million, which would have resulted in an 86% reduction in operating profit to GBP0.1 million and a pre-tax loss. Basic earnings per share for the period grew from 4.2p to 7.3p as the company recognised GBP1.9 million in profits from businesses sold in previous years. As a result the firm increased its interim dividend by 9.5% to 2.3p.


On the balance sheet Dialight held net assets of GBP33.9 million at the period end, net current assets of GBP21.9 million and cash of GBP7 million, with no interest-bearing debt. The company generated net cash from operating activities of just under GBP5 million in the period.


Revenues at the Signals and Illumination division grew by 11.8% to GBP21.2 million in the period on the back of strong sales in the Obstruction Lighting products, which registered 23% year-on-year growth. Things weren’t as bright in the other product areas however, as the firm reported a 16% decline in sales of traffic lights at constant currency rates, which it put down to a major contract win in its comparable period. Dialight also reported a 29% fall in sales of its Architectural Lighting products on both sides of the Atlantic due to the impact of the recession.


In the Components business Dialight reported a 13.9% decline in sales, to GBP13.4 million, which it put down entirely to the difficulties in the global economy. It stressed that it was an approved vendor to the world’s major OEMs in the electronic equipment manufacturer and sold to over 15,000 different customers through a number of different electronic distributors. Sales of its electromagnetic discon- nectors fell by 11% compared to the same period of 2008.


On the whole the firm said margins in its Components unit had remained stable due to the impact of cost cuts while its Signals/ Illumination business had achieved a four point improvement in its margins due to an improved mix of sales.


Dialight’s prospects have brightened since its half-year end as the company has secured a contract for its PowerPulse 200 amp load switch which is linked to the US Government’s efforts to upgrade metering for its power grid. The exclusive agreement, from one of the company’s existing customers, is for a duration of two years and will contribute a significant $15 million in revenues over 2010 and 2011.

OPPORTUNITIES & RISKS

Apart from environmental reasons there are other concrete business reasons for companies to install Dialight’s LEDs. They enable firms to reduce their energy bills and also offer a more durable means of illumination. In addition, lower energy costs mean lower carbon emissions – an appealing aspect in light of increasing environmental awareness. Furthermore, the company’s use of five-year warranties offers firms peace of mind and the prospect of revenue visibility for Dialight if con- tracts are renewed.


Growth prospects are visible in the Obstruction Lighting activities, with Dialight reporting interest from wind turbine and mobile phone operators who could be subject to fines and sanctions from the US’ Federal Aviation Administration and International Civil Aviation Organisation if they do not comply with regulations. Furthermore, the company has developed lighting products for cellphone masts that do not interfere with mobile signals. Another promising opportunity for the firm comes via the United States Advanced Meter Infrastructure Initiative, which hopes to replace 100 million electricity meters, a potential market worth $1 billion.


One of the major risks to the firm’s revenues is the adverse affect of a weakening of the Dollar against Sterling, a particular worry bearing in mind that North America is responsible for the majority of its turnover. Another possible problem is the maturity of the US market where it says over 60% of US traffic signals and 70% of US transit business have been converted to LED use. While the company has spoken of many US cities carrying out trials to confirm the cost and energy savings provided by LED street lighting, a more viable opportunity is present in the European traffic lights sector where the firm feels there is currently a very low adoption of traffic lights. The company also expects growing concerns about global warning to drive the adoption of LED traffic lights and other technologies.

VALUATION

In response to the latest contract announcement broker Canaccord Adams increased its revenue and earnings forecasts for the firm. It now expects pre-tax profits of GBP4.2 million for 2009 and earnings per share of 8.33p, putting the firm on a current-year multiple of 23. If Dialight maintains its 6p dividend (it should given the strong cash position) the shares will yield a reasonably attractive 3.16%. For 2010 expectations are for a recovery in pre-tax profits to GBP7.4 million and earnings per share of 14.73p, which sees the multiple fall to 13.2.


To summarise, this is a financially sound firm operating in an exciting sector that is set to benefit from major green initiatives. LONG TERM BUY

Key Data

EPIC: DIA
Market: FULL
Spread: 190p – 198p (4.04%)

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