The shares of Dialight (LSE: DIA) were hammered last week in the wake of a profit warning, but value could be up for grabs right now.
I doubt the same applies to Ophir Energy (LSE: OPHR). Here’s why.
Oil Prices
On the face of it, the price of oil will likely determine the fortunes of both companies.
If Brent surges, heavy investment by major oil producers will rise over time, which should favour Dialight and its equity valuation. If it falls, Dialight stock could still be a decent bet as part of a diversified portfolio because the company’s future does not not depend solely on macroeconomic trends.
At its current level of 545p a share, it could easily be argued that Dialight trades at a discount of between 15% and 30% versus the value of its parts. That said, Dialight is not an easy call: it has a problem with its order book, which hinders profits, revenues and cash balances.
Ophir’s cash position, meanwhile, does not concern me at present, but economic losses could become problematic over time if oil prices remain subdued. Moreover, Ophir recently lost the backing of a key shareholder, Kulczyk Entities, which sold a meaningful stake via a placing at the end of April.
Dialight
In its trading update on 10 June, when its shares lost about 30% of value, it said that a “reduction in orders is linked in part to a slowdown in the oil and gas sector.“
Its new chief executive, Michael Sutsko, is leading a strategic review of the business that will focus “on the markets in which the group currently operates, together with an attendant review of its operations, supply chain, and product development“.
Cost cuts and extraordinary corporate activity appear to be on the cards, given that its core lighting business deserves full attention.
Should weakness persist, I’d expect material news about divestments of less strategic assets, which would likely contribute to release value at group’s level — investors may have overreacted without considering the potential upside associated to the divestment of the smaller signals and components businesses.
They also seem to believe that a dividend cut may ensue.
While Dialight’s core free cash flow is in negative territory, and a plunge in profitability may force it to pay more attention to working capital management and/or alternative sources of funding, its balance sheet looks solid, so external borrowings are a possibility.
Its relative valuation also points to value.
Ophir Energy
On Thursday, Ophir issued a trading update on its audited reserves and resources as at 31 December 2014.
“The independent reserves and resources reports support the previous management estimates. Combined net 2P and 2C resources as at 31 December 2014 were over 1 billion barrels of oil equivalent,” it said.
The update did little to boost confidence, with its stock down 4% since. At 121p, its shares are not far away from their 52-week low of 112.7p, but such a valuation is fair, in my view; Ophir must convince investors that it can finance its growth plan over the medium term without diluting investors.
Otherwise, its lofty trading multiples for forward revenues and cash flows are very likely to fall.
