Dillistone Group (LON:DSG): A High-Earnings-Growth Hidden Gem in a Stagnant Market

In the shadow of a stagnant recruitment software market, Dillistone Group (LON:DSG) has quietly engineered a remarkable turnaround. Over the past three years, the company has delivered a staggering 113% growth in earnings per share (EPS), transforming from a loss-making entity in 2022 to a breakeven performer in 2023 and a modestly profitable one in 2024. Yet, its share price has lagged, delivering a negative total return of -58% since 2022. This disconnect between earnings momentum and market valuation presents a compelling case for investors seeking undervalued opportunities with strong operational leverage.

The EPS Surge: A Tale of Cost Discipline and Margin Expansion

Dillistone's financial recovery is anchored in its ability to improve margins despite a 12% decline in revenue in 2024. The company's adjusted EBITDA margin expanded to 26.2% in 2024 from 23.5% in 2023, driven by cost restructuring that reduced combined cost of sales and administration expenses by £0.806 million. This operational efficiency translated into a 22% increase in adjusted operating profit and a profit before tax of £0.013 million in 2024—its first profit since 2016.

The EPS trajectory is equally striking. From a loss of -0.93p in 2022, the company returned to breakeven at 0.01p in 2023 and achieved 0.2p in 2024. While the absolute EPS figures remain low, the growth rate is extraordinary, particularly in a sector where many peers struggle to maintain profitability.

The Share Price Puzzle: Why Has the Market Ignored the Earnings?

Despite the EPS surge, Dillistone's share price has underperformed. This mispricing may stem from two factors:
1. Revenue Decline: Total revenue fell to £4.903 million in 2024, reflecting broader challenges in the recruitment sector. Investors may be skeptical about the sustainability of Dillistone's margin-driven growth without top-line expansion.
2. Market Sentiment: The company's long history of losses (its last pre-tax profit was in 2016) has bred caution. Even with a 26.8% operating cash margin—the highest since its 2006 flotation—investors may be slow to re-rate a stock with a history of volatility.

However, the company's recurring revenue model offers a counterpoint. Recurring revenue now covers 103% of administrative costs, providing a stable earnings base. With 90% of total revenue recurring in 2024, Dillistone's business is increasingly insulated from market fluctuations.

CEO Compensation: A Double-Edged Sword

One of the most intriguing aspects of Dillistone's story is its CEO's compensation structure. Jason Starr, the CEO, received a total package of £145,000 in 2024, with 89% of it in salary and only 11% in additional remuneration. This is 49% below the median CEO pay in the British Software industry, where salary typically constitutes 73% of total compensation.

While the low pay may seem like a virtue, the lack of performance-based incentives raises questions about alignment with shareholders. Starr holds shares worth £313,000, which is a positive signal, but it is not enough to fully align his interests with those of investors. The upcoming Annual General Meeting (AGM) on June 4th could be a catalyst for change, as shareholders may push for a more performance-linked compensation framework.

Strategic Alignment and the Path to a Re-Rating

Dillistone's management has demonstrated a clear focus on operational efficiency and product innovation. The company's recurring revenue model, combined with a 26.2% EBITDA margin, suggests strong leverage to scale profitability. However, the CEO's compensation structure remains a drag on investor confidence. A shift toward performance-based pay—such as stock options or profit-sharing—could signal a stronger commitment to shareholder value creation.

The company's Q1 2025 results also offer hope. With the best quarter for new business contract wins since Q1 2023, Dillistone is showing early signs of top-line recovery. If revenue stabilizes and the CEO's compensation aligns more closely with long-term value creation, the stock could see a meaningful re-rating.

Investment Thesis: A High-Conviction Buy?

Dillistone Group is a textbook example of a company with strong earnings momentum and operational leverage, but it is held back by structural misalignment in executive compensation and market skepticism. For investors with a medium-term horizon, the stock offers an attractive risk-reward profile:
- Upside: A re-rating is likely if the CEO's pay structure is reformed and revenue growth accelerates.
- Downside: Persistent revenue declines or a failure to improve market share could limit upside.

At a market cap of £1.8 million, Dillistone is trading at a significant discount to its intrinsic value. The key risks are execution-related—specifically, the ability to grow revenue and align management with shareholders. However, given the company's strong margin expansion and recurring revenue model, these risks appear manageable.

In a stagnant market, Dillistone Group is a rare gem: a company that has turned its back on short-term losses and is now generating sustainable earnings. For investors willing to look beyond the share price and focus on fundamentals, DSG offers a compelling opportunity to capitalize on a mispriced turnaround story.