There is a clear gap between investors' perceptions of Diploma's trading prospects and the company's expectations. So, while the share price has fallen by a quarter since its summer high, management has just fired a big bazooka against its detractors in terms of a one-third increase in the full-year dividend – and it is still covered twice by earnings.
Investor perception may be the problem. Diploma earns high margins by distributing added-value products to mature markets. For instance, it offers a next-day delivery service for replacement seals for construction equipment, designs tests and provides consumables for pathology laboratories. The business also designs and sells wireless harnesses for the aerospace and F1 racing industries. Diploma is deliberately not expanding into emerging markets, but when those markets start to mature and want higher-tech products, the company will move in.
Diploma's strategy is to grow sales by around 6 per cent organically and top this up with revenues from acquisitions. With no debt on the balance sheet it's a "pretty good time for acquisitions", according to chief executive Bruce Thompson. Brokerage Numis Securities expects sales in the current financial year to September 2012 to rise 6 per cent to £245m to produce adjusted pre-tax profits of £47.2m (up from £44.9m) and EPS of 29.7p (27.9p).
DIPLOMA (DPLM) | ||||
|---|---|---|---|---|
| ORD PRICE: | 314.75p | MARKET VALUE: | £356m | |
| TOUCH: | 314.2-315.3p | 12-MONTH HIGH: | 414.25p | LOW: 263.25p |
| DIVIDEND YIELD: | 3.8% | PE RATIO: | 13 | |
| NET ASSET VALUE: | 145p* | NET CASH: | £12.2m | |
| Year to 30 Sep | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2007 | 141 | 22.3 | 12.7 | 5.40 |
| 2008 | 156 | 21.1 | 11.4 | 7.50 |
| 2009 | 160 | 20.5 | 10.8 | 7.80 |
| 2010 | 184 | 26.7 | 14.6 | 9.00 |
| 2011 | 231 | 39.2 | 24.0 | 12.00 |
| % change | +26 | +47 | +64 | +33 |
Ex-div: 7 Dec Payment: 25 Jan *Including intangible assets of £115m, or 102p a share. | ||||
