Diales (DIAL)
The un-disputed champion of turnarounds...
This one comes with a warning. As a stock, Diales is one of the most illiquid on Overlooked and Undervalued. It’s difficult to buy in size and often doesn’t trade for days. Therefore, patience may be required to build a position - be wary and use limit orders.
Diales is a global consultancy with a long history, having been listed on the UK’s AIM market for over two decades. As is often the case, I’m following a painful turnaround. One that started in 2020 and is only now showing signs of a sustainable recovery. There’s a new management team, a new strategy, and finally some genuine improvement in the financial results.
Diales specialises in dispute resolution for large infrastructure projects. Predominantly, within the transport (think Metro installations) or energy (think offshore wind) sectors.
As you can see from the below graphic, most customers are either large global contractors, legal firms, or government entities.
Diales provides three distinct services:
Diales Expert (~40% Total Sales)
Diales employs 46 qualified Expert Witnesses.
When a dispute happens, these individuals can be called on to give evidence within a legal forum such as adjudication, arbitration, litigation, or alternative dispute resolution.
This service is more akin to a legal business than a consultancy. Experts are paid in a similar way to lawyers and must record billable hours. They are also chosen by clients with the help of their legal firms. Which recommend witnesses based on past experience, specialisation (Quantum, Delay, and Technical) and reputation.
Experts are some of the highest paid employees at Diales. Each one must have at least 15 years of industry experience combined with the appropriate cross examination training.
Of all the services, Diales Expert has the highest Gross Margin, which according to management is ~40%.
Diales Advisory (~40% Total Sales)
Diales Advisory helps clients with dispute resolution and avoidance.
This could be in the initial stages of a project. When advisors assist with training, scheduling, and drafting legal contracts.
Or later, when a projects overruns or goes over budget. Advisors help clients recover costs or understand liabilities. They also assist with mediation, if required.
On average, Diales Advisory earns a slightly lower Gross Margin of ~30%.
Driver Project (~20% sales)
Driver Project operates almost independently to the Expert and Advisory businesses.
It has a narrow geographical footprint in the North East of England. Where it places project management specialists into live projects within the power, chemicals, or offshore wind sectors.
Driver Project has the most consistent utilisation at close to 100%. However, Gross Margins are the lowest at ~20%.
The Background
In the 2010s, Diales (or Driver Group as it was known) had a strategy targeting rapid sales growth. Over a decade, consolidated sales nearly tripled from ~£20 million in 2009 to ~£60 million in 2019.
You might expect that rapid growth would be great for shareholders. Instead, it led to an increase in more commoditised, lower quality work in areas such as project management and quantity surveying.
Much of this was based in the Middle East, which became the fastest growing business segment.
As sales grew, profit margins fluctuated wildly. And unlike Europe, the Middle East never achieved sustainable profitability.
Payment terms also deteriorated. Typically, contracts in the Middle East required payment within 120 days. More than double the standard terms elsewhere in the business of around 50-60 days.
Even with longer payment terms, companies and governments in the Middle East tended to be glacially slow to hand over the cash, which in practice could take over a year.
Given this dynamic, cash collection deteriorated as sales grew. Eventually, forcing Net Debt to unsustainable levels - from around zero in 2010 to ~£10 million in 2016.
In order to repair the balance sheet, an equity raise followed in 2017.
The Turnaround
The first management change happened in 2016, with the appointment of Gordon Wilkinson as CEO. His team spent four years attempting to stabilise the business without much success.
In 2020, the current CEO, Mark Wheeler, was internally promoted and a new CFO, Charlotte Parsons, joined in 2022. This new team made more drastic cuts, especially in the Middle East.
They also introduced a more cost effective ‘hub and spoke’ model. Retaining central control in Europe and the UK, whilst targeting smaller offices and strategic partnerships elsewhere.
The closure of offices, particularly in Oman and Kuwait, created large wind-down costs. However, these issues are now resolved and the region is expected to return to profitability this year.
To further strengthen profit margins, a new strategy was implemented to grow Diales Expert, the highest margin service.
Under the current management team, Diales Expert has grown from 24% of sales in 2020 to 38% in 2024, and is expected to overtake Diales Advisory this year.
These changes are increasing the Sales and Gross Profits per Fee Earner. Thereby, demonstrating improving efficiency within the business.
Also, Cash collection is trending downwards, after spiking in 2022. The cuts within the Middle Eastern business finally seem to be working.
Management
As I’ve already alluded to, there’s been multiple changes to the board. The Chair, CEO, and CFO have all been replaced within the past five years.
Another notable appointment was John Mullen. One of the original founders and the largest insider shareholder (with ~4% of Shares Outstanding). He became a Non-Exec Director in June 2020.
The largest outside shareholders are the Swedish investment company AB Traction (with ~28% of Shares Outstanding) and Gresham House Asset Management (with ~20%).
Looking at capital allocation, the new board has been consistently returning cash to shareholders. As a people based business, there’s very little Capex to be re-invested, so most operating cashflow can be allocated elsewhere.
Acquisitions, if they occur, are expected to be small (~£0.5 to ~£2 million) bolt-ons to the Diales Expert business. Essentially, talent acquisitions to increase the skills within the current team.
Otherwise, cash is being paid out to shareholders. The current dividend yield is nearly 7% and there’s a small and regularly reoccurring buy-back program.
Valuation
At 23p per share, the current market capitalisation is ~£12 million. Tangible book value is ~£11 million. Including the Net Cash of ~£4 million, gives an Enterprise Value of ~£8 million.
In the year to 31st September 2024, Diales earned Operating Profits of ~£1 million. Which at first glance, gives us an earnings multiple that appears unappealing.
Looking again, this seems understated. Management have guided towards a 5% Net Margin over the short term (think a year or two). Which on current sales of ~£40 million equates to Operating Profits of at least ~£2 million.
Over the medium term, aspirations are even higher, with a stated aim of achieving 10% Net Margins. A feat that would almost certainly make this investment a home run.
Given the current valuation and the positive momentum in the underlying business, I think the downside is more than baked into the price. There’s a sizeable cash pile, a long and profitable operating history, and multiple signs of a successful turnaround.
Granted, there may be some cyclicality. Especially given the exposure to large infrastructure projects.
However, dispute resolution is a durable industry. According to management, around 55% of projects finish later than planned and/or over budget. Bent Flyvberg, a leading academic on the subject thinks the figure is much higher. He analysed around 16,000 major projects going back to 1910 and found that over 90% of these went over budget, over schedule, or both.
As long as there’s large projects, the services provided by Diales should be in demand.
I like to own cheap and durable business. Especially those with improving results and shareholder friendly management teams. At the current price, I think there’s no disputing that this turnaround should be worth more. Potentially, a whole lot more!
(Thus far, I’ve bought a starter position, amounting to ~5% of my portfolio.)
Disclaimer. This article is for informational purposes only, and should not be seen as investment advice. Please do your own research before investing in any company mentioned.
Financial Model and Useful Links:
For more information on Diales Expert, I’d recommend reading through this brochure.
This link to the most recent investor presentation from the 4th December 2024 may help with getting up to speed on the business.
This is excellent work Adrian. Great use of charts.
Diales was very close to making it into my most recent post covering 10 of the most interesting/attractive AIM stocks - I can't really remember why it didn't, but having read this I feel like it should have. Will need to take a closer look.