The prospects are looking brighter for light emitting diode designer Dialight PLC (LON:DIA), based on yesterday’s trading update.
City firm Peel Hunt has upgraded the stock to ‘buy’ from ‘hold’ now the lighting technology company seems to have kicked the habit of issuing profit warnings and switched instead to raising expectations.
The company said it is now targeting underlying earnings (EBIT) for 2016 “materially ahead of expectations”, albeit helped by foreign exchange movements.
It’s barely a month since the company said full-year numbers would be in line with expectations, so the forex tailwinds must really be helping.
“The recent trading update is showing better revenue progression, which, coupled with good margin prospects from Dialight’s outsourcing to a Sanmina plant in Mexico, is providing useful earnings momentum,” Peel Hunt said.
“On schedule for completion in six months’ time, the outsourcing emphasis can then move to cost down engineering and volume purchasing. We see better gross margin potential than before in a re-assessed bull case,” Peel Hunt said, as it whacked its target price up from 550p to 900p.
The broker opted to take its sweet time adjusting the target price (TP), despite the shares advancing from 380p in the middle of February to 700p before yesterday’s trading update, as it wanted time to assess whether the group’s new change of direction had firmly taken hold.
“Risks have reduced and we would now give a 75/25 balance to the Bull/Bear case, an average of 900p, our new TP. It’s not without risk, and revenue growth needs to accelerate to justify our full bull case, but Dialight is moving in a valuable direction,” Peel Hunt believes.
Broker Investec appears to agree. On Tuesday, it upgraded the stock to ‘buy’ and set a price target of 850p.
Shares currently trade at 786p.