Good morning!

Dialight (LON:DIA)

Share price: 732p (up 10.8% today)
No. shares: 32.5m
Market Cap: £237.9m

(disclosure: I have a long position in this share at the time of writing)

Final results for the year ended 31 Dec 2014.

It strikes me as odd that the market has reacted so positively this morning (the share is up nearly 11% today) to results which are only slightly above expectations. Indeed, the company flagged on 16 Jan 2015 that it was trading in line, and I reported on the company that day, saying I thought it looked good value at 789p. So it was utterly perplexing why these shares took a dive down to around 600p in recent weeks, only to come back up again!

I know shares fluctuate in price all the time, but that is usually driven by changes in the company's performance or outlook. There haven't been any such changes here to warrant such price gyrations, so I remain perplexed!

Actually, thinking about it, I wonder if the recent change in CEO might have given some shareholders the willies? Judging from today's results, there doesn't appear to be any underlying problem.

Earnings - up 20% to 36.8p (broker consensus is for 35.9p, so a small beat there). Note that the company has been a bit cheeky in classifying a £2.8m inventories writedown as non-recurring. This means prior year profits were effectively overstated by £2.8m. I generally find the accounting policies at this company a little too aggressive, e.g. they capitalised £3.5m in development spend in the year, which was well above the £2.3m amortisation charge for the year, thus providing a boost to profits.

Valuation - at 732p the PER works out at a rather warm 19.9. However, with EPS forecast to rise again to 45p this year, then the PER would drop to a more reasonable 16.3. If earnings continue rising in subsequent years, then the shares might end up looking cheap in a couple of years' time. Although if there are any nasty surprises between now & then, the price could take a tumble. This is the problem with almost everything at the moment - valuations look pretty full, and don't factor in any downside risk.

54f44264482f7DIA_chart.PNG

Balance Sheet - Dialight sails through all my balance sheet tests with plenty of room to spare, so it looks a safe share in terms of…

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