UK Markets open in 4 hrs 22 mins

Should you buy this fallen growth stock after 20% price crash?

Alan Oscroft
Arrow descending on a graph

Shares in Dialight (LSE: DIA) slumped by as much as 23% in early trading Tuesday, making it the FTSE’s biggest early faller after the company warned that full-year profits will be hit by Donald Trump’s trade war with China.

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 Forecasts are now out of date and likely to be wildly optimistic, and I can see the share price declining further if the new estimates are as pessimistic as I fear.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.

More reading

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of Equiniti. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019