Small Cap Value Report (Mon 26 Feb 2018) - DIA, AVAP, QTX, RTC

26th Feb '18 by Graham Neary

41 comments 13531 reads

Good morning! Please feel free to share your comments and suggestions.

My updated list of stocks to view having seen your suggestions:

Dialight (LON:DIA) - full year results
Avation (LON:AVAP) - half-year report
Quartix Holdings (LON:QTX)
RTC (LON:RTC)

Cheers,

Graham

Dialight (LON:DIA)

Share price: 508p (-4.5%)
No. of shares: 32.5 million
Market cap: £165 million

Full year results

This company makes industrial LED lights for traffic control, building sites, etc.

Its market cap was £320 million when I covered it last year - which I couldn't understand, given its organic revenue growth rate of just 3% (ignoring its gains from currencies).

It had just produced H1 profits of £4 million, on revenues of £92.7 million.

Today it announces full-year pre-tax profits of £3 million, on full-year revenues of £181 million.

So not only did H2 revenues fall by about 5%, it swung into a loss for the period.

The "underlying" profit numbers imply that H2 was still profitable, but the underlying items were very big both this year and last year.

Here's a breakdown of all the "non-underlying" items. They mostly relate to set-up costs in outsourcing production to a site in Mexico ("production transfer costs"), along with a miscellany of others:

Problems at the outsourced manufacturing partner are to blame for the weak performance in H2, with issues which "hampered our ability to deliver orders to our customers".

The manufacturing partner was unprepared for the complexity and the scale of the manufacturing process required by Dialight. Certain Dialight employees are now stationed full-time there, improving their process.

As you might expect, these issues are ongoing through H1, so that the company is guiding investors for 2018 with the dreaded H2-weighting:

We are taking corrective action and in the near term are wholly focused on the manufacturing challenges which will continue to impact our results in H1. As a consequence our results for 2018 will be heavily weighted to H2 reflecting the successful resolution of these issues.

Market leader?

Despite the problems, Dialight remains very bullish on merits of its technology! It claims to be the market leader in industrial LED lighting.

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FREng

26th Feb '18

Eckoh (LON:ECK) has a contract announcement today that TechMarketView has commented on positively. The flow of good news seems to be continuing so maybe they are winning a useful place in the secure payment market. I'm watching and wondering, not yet holding. Any views?

JohnEustace

That Dialight (LON:DIA) factory in Mexico has their name on it. If things were going well I expect they would describe it as all theirs, but as they aren't it's an "outsourced partner" - Dialight de Mexico S. de R.L. de C.V.

Still the weather's nicer in Ensenada than here. Interesting to see that Mexican labour law allows them to specify that they want to hire women.

https://earth.app.goo.gl/58Mbq

tony akram

In terms of RTC perhaps someone can clarity my concern .

Seems to have debt of £4.7m , market cap is £8.71m therefore to me debt is half market cap !! which IMHO is not good , if I am wrong happy to listen to others .

mrosbiston

my take on the RTC (LON:RTC) debt is that this amount of £4.7m is related to their HSBC invoice facility and is just related to current borrowings - my belief is this is standard for their industry.

I like this company, ticks a lot of boxes for me - however, todays results are flattered by the favourable tax treatment reversal they made. This reversal of £74m is roughly 30% of the gain in net profit and increase in basis EPS.

sharw

Dialight (LON:DIA)

Graham says:

"Market leader?

Despite the problems, Dialight remains very bullish on merits of its technology! It claims to be the market leader in industrial LED lighting".

Transcript of presentation now available at:

http://www.ir.dialight.com/media/1336/dialight-results-memo-2017-final.pdf

Bullish indeed:
"We must not forget that Dialight remains the market leader in industrial LED lighting,
building on the largest installed base in that market. The market we operate
within is largely unpenetrated and the company believes that it is well positioned
with the right products, global scale and financial strength to continue to be the
leader in this space despite the short term issues we are facing".

Jam tomorrow?

Graham Neary

Hi matylda,

re: Quartix Holdings (LON:QTX)

Thanks for the request.

I think I can see the justification for the valuation, and have described it in the report above. But I don't currently hold the shares. So we probably have that in common!

Graham

Hi Francis,

Thanks for mentioning Feedback (LON:FDBK) here. I can't quite justify writing up on it but your comment alone might prompt some readers to take a look at it.

Best wishes

Graham

re: Avation (LON:AVAP)

Thanks for your valuable comments Carcosa! I have referenced them in the report.

Regards

Graham

Edit: this may be an existing plant. It seems the outsourcing issues are at Sanmina in Guadalajara.

WDWombat

Dialight - the Senior Partner of the largest (20%) shareholder is on the board. He cannot be happy and perhaps is the reason they fired the previous CEO in January, the man who one assumes was influential in the Mexican outsourcing business and concomitant problems. 75% of the business is in N America so Mexican production would seem to make sense but there seems little chance of volume production, being largely project based? I would like to know a bit more about the competition and why they are not prominent in the Far East. Market cap today is around the same as sales but x2 net asset value, more if you exclude intangibles, and margins look pretty poor. At least there is no debt but they have a lot to prove.

Graham

Your next section should be RTC (LON:RTC) not RTX, I think.

Hi FREng, you are correct- 'twas a typo. G

Hi, I've included RTC (LON:RTC) in the report now. Cheers.

It is indeed a bit small for the report but I'm happy to make an exception when there are lots of requests.

re: RTC (LON:RTC)

Hi Tony, you are right to focus on that number, as it is a big one.

However, it's not like ordinary debt. It's a working capital facility to boost short-term cash flow, as described in my report above. While it would be distressing if the company were to lose access to it, it should not be very likely to lose access to it given that the bank is repaid by customers paying their invoices. Banks like this type of business.

matylda

Quartix Holdings (LON:QTX) - Much appreciate the detail and comment Graham - Thanks a lot.

hawkipa

Hi, re Avation (LON:AVAP) I don't know much about aircraft leasing but thought it worth mentioning that a family office I know were heavily involved but started moving out of aircraft into helicopters (fixed rota wing I think they call them) from 2016 as there has been a substantial increase in competition. Apparently, helicopters are the choice market now because of the long life of them and excellent residual values vs aircraft.
Regarding refinancing, as a B+ credit I would consider the possibility of debt refinancing a significant issue but at the moment with its USD trading sub 2% and clearly an index constituent the debt markets aren't showing any concerns on that front. Plus if you think they look to have issued in 2015 with a 7.5% coupon last, even in a rising yield environment they could theoretically refinance lower than this as an all in yield even after a substantial rates rally and possibly even continue to reduce their overall cost of funding. I suspect origination desks will be pitching to them almost weekly pushing the case to lock in financing now. It will also have to be heavily covenanted due to the nature of the underlying assets so much of the fears around the junk issuance right now (ie cov lite) won't apply to this issuer.

lemonjar

Thanks for highlighting Eckoh (LON:ECK) FREng, not familiar with it but at a very initial glance the recent contract wins since their half year update in Nov seem encouraging, especially as it relates to gains in the larger US market. PER's maybe not that cheap but not sure how it compares with other secure payment processors, and its down a bit since Nov. No debt, ROCE improving.... hmmm. I'll need to read up on SCVR coverage though looks like we skipped the Nov update last time round, would be very interested in others' thoughts too...

Cheers

iainc

Many thanks, Graham

Carcosa

27th Feb '18

Avation (LON:AVAP) - Final Words (for this thread)

Was pleasing to see several good comments regarding the HY results. Amongst those, Graham mentioned

"...When you put all of these numbers together, the after-tax return on equity comes out at a modest level. We will have to wait and see what happens for the full-year 2018, but previous years have seen ROE somewhere around the 12% level."

I would say that modest level is about 6.5% based on the HY results. However if you do a bit of reasonable forecasting then I see that being raised to 14% by the FY end.

"I think I need to study it more, but one thing I'd mention is that leading indicators in the junk bond markets suggest that capital might become more expensive in the months and years ahead."

Yes, but in reality does it matter? Some 95% of existing debt is already fixed/hedged. Any new deals in a higher interest environment will be passed on to the airlines. Quality airlines readily accept this.

My forecasts for the full year are showing significant improvements over the prior year.

A copy of the Investor Update Call should be made available on the company website http://www.avation.net/investo... later today. The more useful stuff can be found in the Q&A session.

JTG

As an ex early holder of Dialight (LON:DIA), and as a former manufacturer, I would just say, exercise caution. Their hazardous lighting niche is valuable, I suspect no mainstream stuff is. Any manufactured stuff like this, which the mass public has now woken up to, MUST wind up at the lowest-cost operator. How many European PV manufacturers are making a profit now?
By the way, if there are any, please correct me and I'll research them.

Small Cap Value Report (Mon 26 Feb 2018) - DIA, AVAP, QTX, RTC

Dialight (LON:DIA)

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Graham Neary

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