Reiterating that the leading supplier of LED lighting is still in recovery mode, the firm told us it has “seen early signs of recovery but this has been hampered by the slowdown in the global markets,” adding that “with our exposure to US markets, the uncertainty of the trading relationship with China continues to be a significant headwind.”

Though 2018 results were resilient, full-year EBIT for 2019 is now expected in the range of £5m to £8m, after a further adjustment of around £6m in non-underlying costs.

Delayed recovery

In the firm’s Signals and Components business, some recovery had been expected in the second half, but that’s not now anticipated until Q2 2020 after a “difficult year, with market conditions remaining weak.”

The Dialight share price has lost three-quarters of its value since June 2017, so is it worth buying now in anticipation of a 2020 recovery? Forecasts are now out of date and likely to be wildly optimistic, and I can see the share price declining further if the new estimates are as pessimistic as I fear.

There haven’t been any dividends for a few years, and the predicted return to annual payments in 2020 is now looking very unlikely indeed. Then there’s net debt, which stood at £11m at the interim stage, and that’s worryingly high compared to the new earnings outlook.

No, I’m sticking to my recovery investment strategy, and I won’t buy shares until I see the recovery actually happening.

Another downgrade

Equiniti Group (LSE: EQN) figured high in the list of morning fallers too, briefly dipping 25% before settling at around 10% down, and again, we’re looking at sustained weakness with a 28% fall since March 2018.

The international technology-led services and payments specialist has downgraded its outlook. Though revenue should come in towards the upper end of expectations, earnings are now set to hit the lower end due to weakening in the firm’s higher-margin UK corporate activity.

Revenue is put at between £550m and £567m, with a range of £136m to £142m for underlying EBITDA.

There doesn’t seem to be any problem with client retention, with Equiniti counting BT, Centrica, Fidelity and Hewlett Packard Enterprise among the top names and telling us it has “continued or extended all relationships.” New client wins are said to be encouraging, with additions in all of the company’s divisions.

Long-term visibility

What I’m seeing in all this is a strong company with good long-term business lined up and with, in its own words, “good forward visibility of revenues.” I definitely see growth opportunities over the medium term too. I’m wary of debt, though, and Equiniti has indicated year-end leverage of between 2.3x and 2.5x. I’d like to see that come down, though in a period of tightening margins, that doesn’t seem likely to happen.

We’re looking at likely P/E multiples of around 11, which don’t look onerous, though high debt does distort the underlying value of that.  I’ll keep watching and will wait for full-year results.

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While its prospects continue to appear bright as a result of having a 4%+ dividend yield and favourable growth potential, a number of stocks could outperform it. Here are two examples which seem to have wide margins of safety, and could therefore be worth a closer look.

Improving outlook

Sustainable LED lighting specialist Dialight (LSE: DIA) released its 2018 results on Monday. They showed its profit was in line with expectations in what was a challenging year for the business. During the course of the year it was able to reduce late orders while bringing all product assembly back in-house. It has also terminated the relationship with its manufacturing partner, and aims to deliver further operational improvements during the current year.

Looking ahead, the company is forecast to post a rise in net profit of 47% in the current year. This has the potential to catalyse investor sentiment, while a price-to-earnings growth (PEG) ratio of 0.3 suggests the stock offers a wide margin of safety.

Certainly, the company’s past performance has been challenging. However, a revised strategy which includes three planned product launches in 2019, as well as a new market approach which centres on regional technical and product innovation, could catalyse Dialight’s performance over the long term.

Value opportunity

Also having the potential to outperform the FTSE 100 is British American Tobacco (LSE: BATS). The wider tobacco sector has fallen out of favour with investors over the last couple of years, with concerns raised about its longevity. Increasing regulations and a shift in consumer tastes towards healthier lifestyles could impact negatively on demand. With relatively high and consistent volume declines across the industry, there could be further uncertainty ahead.

However, British American Tobacco and its peers also have growth opportunities in the reduced-risk product segment. Products such as heated tobacco and e-cigarettes are proving increasingly popular among consumers and, who knows, could even eventually replace cigarettes. As sales increase, the cost of production is likely to fall, and this could lead to improving profitability across the sector.

While cigarette volumes may be falling, prices continue to rise. This means British American Tobacco continues to deliver improving levels of net profit, with its bottom line forecast to rise over the next couple of years. With the company’s shares having a dividend yield of 7.3% from a payout which is covered 1.5 times by profit, they seem to offer value for money as well as income investing potential.

Therefore, while unpopular at the present time, the company could generate impressive total returns over the long run to outperform the FTSE 100. As such, now could be an opportune moment to buy it.

The post Have £1k to invest? I think these 2 growth shares could smash the FTSE 100 appeared first on The Motley Fool UK.

Heavier-than-expected UK losses have led to an underwriting loss for the quarter, leading chief executive Stephen Hester to tell us that “actions to improve in the UK are well under way,” while the company reported a strong period in its international business.

Problems in the UK stem partly from bad weather losses, but RSA’s motor and marine insurance sectors have been suffering too. But on the upside, UK household and commercial property insurance saw improvements.

Although reported pre-tax profit should be ahead of last year, on an underlying basis it’s expected to come in below 2017’s result — and that was put down “primarily to elevated weather costs.”

Buy or sell?

What does all this say about RSA as an investment, and has it hit Mr Hester’s “best-in-class ambitions” for the company?

Well, the first thought that strikes me is that insurance companies are in the business of shouldering risk for their clients, so when things go bad it’s the company that takes the hit and not the person with a wind-blown tree crushing their car, or whatever calamity it is.

So investors should expect to see quarters like this, which are pretty much inevitable for any insurance company. And as an investor who likes the insurance business myself (I hold Aviva shares, but I’ve owned RSA in the past), I’d be looking to top up on share price drops like this.

On the whole, I still see RSA as a solid long-term investment.

Another big drop

Industrial LED maker Dialight (LSE: DIA) was another of the FTSE’s major casualties on Friday, with its share price crashing by more than 20% as the market opened, before regaining a good deal of that to stand around 7% down by midday.

Dialight’s bad news came on Thursday after the markets closed, as the firm announced the termination of its agreement with its current manufacturing partner. The partner’s performance, which Dialight had described as “disappointing but stable,” has apparently deteriorated.

And with production of key products already shifting back to its own facilities, a line has been drawn under this unfortunate episode.

The company now expects to record full-year operating profit of around £8m to £10m, which allows for £6m to £7m additional costs associated with its manufacturing partner problems.

Valuation dented?

Dialight shares had been on an attractive growth valuation with a P/E multiple of 17 for the current year, expected to drop to under 12.5 by 2019, and with PEG ratios of only 0.3 for each year (with anything under 0.7 usually seen as attractive).

That valuation is not looking so tempting now, but I think a successful full transfer of manufacturing could see growth resume fairly quickly. I’ll be watching for the firm’s next update scheduled for early December.

The post Is FTSE 100 faller RSA Insurance a top buy after 9% plunge? appeared first on The Motley Fool UK.

From recovery to growth

Dialight specialises in sustainable LED lighting for industrial applications — an attractive growth market. When I wrote about the company in February last year, a transformation of its business model — a key element of which was outsourcing manufacturing — was progressing well. The shares were trading at 970p but my confidence in the outlook proved misplaced. The move to outsourcing manufacturing turned out to be not far short of disastrous and Dialight replaced its chief executive at the start of this year.

The company’s shares are up 7% on Friday’s close, but at 500p remain well below previous highs. New chief executive Marty Rapp has moved an increasing proportion of product assembly back in-house, reducing late orders significantly and also delivering an excellent cost performance. This and other strategic and operational changes appear promising to me and Mr Rapp told us: “We are now resuming a more aggressive approach to delivering growth, as we transition from recovery to growth.”

Good margin of safety

Dialight is not out of the woods yet and there remains some risk. The company admits that its “extended operational difficulties have bruised our customer relationships and market share.” However, Mr Rapp said: “We are confident that we can and will recover both.”

City analysts are forecasting a 62% rise in earnings this year, followed by 41% next year. At the current share price, this gives a price-to-earnings (P/E) ratio of 17.2, falling to 12.2, and price-to-earnings growth (PEG) ratios of 0.28 and 0.3 — well to the good value side of the PEG fair value marker of 1. As such, there appears to be a good margin of safety and I rate the stock a ‘buy’.

Transformation

Back with Barclays, current chief executive Jes Staley has yet to be rewarded for his confident purchase of £6.5m worth of shares at 233p ahead of taking up his appointment in December 2015. With the shares currently trading at 193p, he’s down over £1m at the moment.

As has been well-documented, historical misconduct issues have dogged the company. Only last week it was announced that the Serious Fraud Office (SFO) is seeking to reinstate charges relating to the bank’s capital raisings of 2008, which were dismissed by the Crown Court in May. However, a line has largely been drawn under legacy issues, even if Barclays fails to get the SFO application dismissed by the High Court.

Meanwhile, Mr Staley has been reshaping the business into “a transatlantic consumer, corporate and investment bank, anchored in our two home markets of the UK and US, with global reach.” This transformation is behind the strong forecast earnings growth I mentioned earlier. The current-year P/E is 9.6, falling to just 8.4 next year, and with PEG ratios of 0.4 and 0.6, Barclays could be the FTSE 100‘s best bargain. I see a return to 350p on the cards and rate the stock a ‘buy’.

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Despite this, it’s not the only growth stock which could be worth buying right now. Reporting on Tuesday was a company that appears to offer high growth potential at a reasonable price. As such, it seems to offer investment potential for the long run.

Improving performance

The company in question is industrial LED lighting technology specialist Dialight (LSE: DIA). Its trading update showed that it has been able to continue its focus on addressing operational issues. They have been caused by an incompatibility between its contract manufacturer’s internal systems and the requirements of its product portfolio. However, the company remains upbeat about the potential for improvement in this area, and believes it has the right products and a market with strong growth prospects.

Due to those operational issues, the company’s performance is expected to be second-half weighted. It’s forecast to post a rise in its bottom line of 71% in the current year, followed by further growth of 44% next year. Despite such strong growth prospects, the company trades on a price-to-earnings growth (PEG) ratio of just 0.3, which suggests that it has a wide margin of safety.

Therefore, while its outlook is risky due to the operational issues it faces, Dialight appears to offer an enticing risk/reward ratio. As such, now may be the right time to buy it.

Changing outlook

Similarly, Sainsbury’s could also be worth buying at the present time. Although UK consumers have experienced a difficult recent past due to higher inflation, Tuesday saw news released that wage growth has moved ahead of inflation for the first time in around a year. While the measure of inflation used includes housing costs, it nevertheless highlights that the pressure on consumers may now be easing.

This could be good news for retailers such as Sainsbury’s, with the potential to deliver improving financial performance as a result. The company is already forecast to record a rise in its bottom line of 10% this year, followed by further growth of 7% next year. These figures could gain a boost if consumer confidence improves and it may lead to an upgrade in its outlook.

With Sainsbury’s trading on a PEG ratio of 1.5, it seems to offer excellent value for money. The impact of the Argos acquisition may not yet have been fully felt, and this could lead to a stronger performance from the business over the long run. As such, it appears to offer high returns with relatively low risk due to its current valuation.

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However by 2013, competitors had started to cotton on to Dialight’s success. Increased competition, coupled with Dialight’s own failures, resulted in a tidal wave of problems for the group. Profits slumped from a high of £14m in 2012 to a lowly loss of £2.8m by 2016, even as revenues continued to expand, hitting a high of £182m for 2016.

And to me, it looks as if these issues are going to continue into 2018. 

Uncertain year

Even though management issued an upbeat forecast for 2018 alongside the 2017 numbers, reading between the lines, it seems as if a cloud of uncertainty is going to continue to hang over Dialight throughout the year. 

Specifically, CEO Marty Rapp said: “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.” He then went on to say that “results for 2018 will be heavily weighted to H2.“

So until the company can prove that it’s back on track in the second half, I believe the market will continue to view the business with a degree of scepticism, especially considering it’s been struggling to turn itself around since 2012.

Moreover, even if management does manage to right the ship, the stock’s valuation of 15.5 times forward earnings is too costly in my view for a turnaround situation.

Keeping it in the family 

Considering the above, I would dump Dialight in favour of sector peer Dewhurst (LSE: DWHT).

As Dialight has struggled, Dewhurst has pushed ahead over the past five years. For the year to the end of September, the company reported sales growth of 12.2% and profit before tax of £6m, up 17.3% year-on-year.

As well as this growth, there are two other key reasons why I like Dewhurst as an alternative to Dialight. 

Firstly, nearly 50% of the company’s shares are still owned by the Dewhurst family, which means that management is more likely to act in the best interests of shareholders… because they are the shareholders.

Secondly, the company has a more unique product offering than Dialight. Rather than mass producing LEDs, Dewhurst designs and manufactures critical products for equipment such as lifts and so-called ‘street furniture’ such as traffic management bollards. These products are not interesting but they are specialist, and Dewhurst’s strong relationship with its existing customers should help it maintain a leading position in the market.

Unfortunately, the one downside to this stock is its price. Shares in the company currently trade at a forward P/E of 22 and support a dividend yield of 1.1%. With earnings per share set to grow by just 1% for 2018, it’s difficult to justify the premium valuation.

That said, after stripping out cash balance worth 213p per share, the shares trade at a more modest multiple of 17.6 times forward earnings which, in my view, is a much more appealing valuation.

The post Why I’d dump this struggling turnaround stock in favour of this growth monster appeared first on The Motley Fool UK.

The London-based business sank to 500p per share at one point in start-of-week trading before coming off that low, although it still remains 3% down on the day. Dialight’s market value has halved during the past year, including a double-digit percentage fall after a painful profit warning in November on the back of manufacturing issues that hampered customer deliveries.

Lighting up

But today’s release suggests that it could be turning the corner, even if some additional near-term pressure can be expected.

Chief executive Marty Rapp commented: “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 the first half. As a consequence our results for 2018 will be heavily weighted to the second half reflecting the successful resolution of these issues.”

Revenues at Dialight slipped fractionally in 2017 to £81m, a result that caused underlying pre-tax profit to fall 25% to £9.4m.

But City analysts are expecting it to bounce back from last year’s troubles straight away, and they are forecasting earnings growth of 75% this year and then 31%.

Not only do these forecasts make the business brilliant value for money — an undemanding forward P/E ratio of 16.1 times and a bargain corresponding sub-1 PEG of 0.2 — but these bubbly forecasts support expectations of explosive dividend growth.

Dialight, which hasn’t paid any dividends for the past three years, is finally expected to delight shareholders this year with a 5.3p per share reward, and then to hike the payment to 9p. Yields of 1% and 1.8% respectively may not be ‘beat skippers’ but I am confident that dividend expansion should keep ripping higher along with earnings as the environmental and cost benefits of its products drives demand.

Cruising higher

Those still fearful over Dialight’s bounce-back ability may want to take a look at Wizz Air Holdings (LSE: WIZZ) instead.

With air travellers demanding more and more bang for their buck, the FTSE 250 flyer has a larger and larger pie to exploit. Competition is a problem, of course, but this is not expected to prove a barrier to breakneck earnings growth in the near term and beyond. Bottom-line rises of 25% and 19% are forecast for the years to March 2018 and 2019 respectively.

Wizz Air’s route expansion programme lays the groundwork for strong and sustained profits growth in the years ahead, as does its focus on the fast-growing emerging markets of Central and Eastern Europe.

Despite its bright profits prospects, the airline can be picked up on a prospective P/E ratio of just 14.9 times (and a corresponding PEG reading of 0.8) for the upcoming fiscal year. This provides plenty of potential upside for investors to exploit.

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However, with higher risks can come higher rewards. Smaller companies have historically outperformed their larger peers in the long term. With that in mind, it could be worth buying these two small-caps for the long run.

Upbeat outlook

Reporting on Monday was LED lighting technology specialist Dialight (LSE: DIA). The company announced its CEO has stepped down with immediate effect after its recent product delivery performance proved significantly disappointing. It states that the new CEO, Martin Rapp, has prior experience in the sector, and that it may be possible for him to help lead the business through its current difficulties.

In terms of trading, Dialight expects its revenue and EBIT (earnings before interest and tax) to be £181m and £9.7m, respectively, for the year to 31 December 2017. It continues to expect a second-half weighting for the company’s trading performance in 2018. It remains confident in its long-term growth prospects and in the sustainability benefits of its products for customers.

With the stock forecast to deliver a rise in its bottom line of 76% in the current financial year, it appears to have a bright future. Certainly, there is scope for this figure to be downgraded significantly, but with the company’s shares trading on a price-to-earnings growth (PEG) ratio of just 0.2, they seem to offer a wide margin of safety. Therefore, while potentially risky, Dialight could offer high rewards in the long term.

Encouraging progress

Also updating the market on Monday was industrial fuel cell power company AFC Energy (LSE: AFC). It announced that it has completed the successful development and operational validation of the enhanced fuel cell stack and cartridge. It incorporates a number of design enhancements initiated over the last year and claims it exhibits significant progress in terms of longevity, availability, cost and efficiency measures.

Encouragingly, the results achieved thus far from operating the fuel cell provide outputs which closely match the results observed from months of extensive computational simulation.

Additionally, the latest electrode pairings that were tested during December show extended operational life for the fuel cell electrodes. They “significantly exceed” the longevity targets set for 2017. There is now a plan to undertake ongoing testing work for delivery of an electrode pairing that will achieve a four-year operational life.

Following its update, the AFC Energy share price has risen 6%. Although the stock remains highly volatile and risky, the growth potential for cleaner forms of energy remains high. As such, while it should only form part of a diversified portfolio, it could generate exceptionally high returns in the long run if it’s able to continue with the progress made in recent months.

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Pendragon shares have fallen by 18% to 24p at the time of writing. In this article I want to consider what we know and whether the shares might now deserve a closer look.

Profit slump

The immediate concern is that profits appear to have fallen sharply. Full-year underlying pre-tax profit is now expected to be about £60m, around 20% lower than the £75.4m figure reported last year.

The company — whose UK businesses include Stratstone and Evans Halshaw — says that the drop in sales is due to falling new car sales and a consequent drop in used car prices. During the third quarter, the firm’s gross profit on both new and used cars was 20% lower than during the same period last year.

What concerns me most is that the slump in profits appears to be very rapid. During the six months to June, underlying pre-tax profit was £48.5m. If Pendragon expects a figure of £60m for the full year, then that implies that second-half profit is only expected to be about £12m. That’s a big drop.

Change of strategy

To try and reduce its exposure to the cyclical new car market, Pendragon wants to pivot its business towards software and used cars. The group produces a software system widely used by car dealers and is aiming to double used car revenue by 2021.

By contrast, the new car business is being placed under review in both the UK and the US. It’s not yet clear what the outlook is for next year, but with new car sales falling I’d be very cautious. In my view Pendragon isn’t cheap enough yet to be a recovery buy.

I might consider this one

Shares of LED lighting group Dialight (LSE: DIA) fell by 15% on Monday morning, after the firm warned that profits would be lower than expected this year.

This company ran into trouble a couple of years ago, but appeared to be on the road to recovery last year. Earnings per share were forecast to rise by 31% this year and by 44% in 2018.

However, Dialight’s turnaround strategy included a shift to outsourced production. This transfer appears to be causing some “short-term challenges”. As a result, full-year operating profit is now expected to be £13.5m to £15.5m.

The equivalent figure for last year was £13.1m, so Dialight is still on track to report profit growth this year. But the gain is much less than was hoped for.

Although today’s news is disappointing, this turnaround does appear to be heading in the right direction. Teething problems with outsourced manufacturing aren’t entirely surprising, after all. Despite these problems, the board still expects to end the year with “a strong net cash position”, and is considering reinstating the dividend.

I estimate that Dialight shares trade on a 2017 forecast P/E of about 25 after today’s fall. But if earnings rise as expected next year, this P/E could fall to around 15 in 2018. The shares might end up looking cheap at under 700p.

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Bright future

Holders of shares in £322m cap LED lighting technology company Dialight (LSE: DIA) will have enjoyed a stellar last 18 months. Trading around the 400p mark in early 2016, the stock now changes hands for just below 1000p — a 150% return for those brave enough to buy after several years of poor performance and eventual demotion from the FTSE 250. Based on today’s interim figures, it looks like this positive momentum will continue for some time to come.

The six months to the end of June saw the company increase revenue by 16% to 92.7m (3% in constant currency). Statutory pre-tax profit of £4m was also a great improvement on the £7m pre-tax loss sustained in H1 2016. To cap things off, Dialight also had £12.7m in net cash at the end of the interim period compared with £7.2m a year earlier.  

Commenting on the results, relatively new CEO Michael Sutsko said the company remained focused on delivering on its “ambitious growth strategy” with nine out of 12 product lines now transferred to the company’s manufacturing partner following a restructuring of the business. With the remaining three lines due to be transferred by the end of 2017, expectations of performance in H2 were unchanged. 

Unfortunately, the surge in Dialight’s shares over recent times has left them trading at a prohibitive-looking 28 times forecast earnings. Nevertheless, the company’s relatively low price-to-earnings growth (PEG) ratio of just 0.6 — based on expected EPS growth of 35% in 2017 — suggests that the shares might be a far better deal than they first appear. 

Brexit-proof?

Also reporting today was £367m cap SThree (LSE: STHR), a company that provides specialist recruitment services in the science, technology, engineering and mathematics industries across the globe.

Despite mixed trading conditions, revenue climbed 17% to £521m in the six months to the end of May (or 7% when currency effects are taken into account). An encouraging 26% rise in adjusted operating profit (5% at constant currency) to £19.3m was also reported.

Although performance in the UK and Ireland was perhaps inevitably impacted by last year’s referendum result, this year’s election outcome and reforms in the public sector, the company’s operations in the US market fared much better. Indeed, its second largest region now represents 22% of group gross profit. Those concerned by the impact of our forthcoming EU departure should also note that 80% of SThree’s earnings over the six month period came from overseas — 7% more than at this time last year.

Like Dialight, the firm boasts a low PEG ratio of just 0.9. Unlike Dialight, however, shares in SThree currently change hands at a far-more-reasonable looking 13 times forecast earnings for 2017. Despite remaining stagnant for many years, the shares also come with a juicy forecast yield of almost 5% that should appeal as much to income investors as those focused on capital growth.

Aside from the above, the small-cap now boasts a net cash position of £5.5m (compared to a debt burden of £4.4m in May 2016) and manages to generate high returns on the capital it invests.

Climbing almost 3% today, I think the stock warrants far more attention than it’s currently receiving.

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