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Bolt-ons boost Diploma top line

Acquisitions are driving revenue growth at the conglomerate. That's no bad thing, says Diploma's chief executive
May 17, 2016

A 10 per cent increase in half-year revenues at building components specialist Diploma (DPLM) looks impressive, but strip out the contribution from bolt-on acquisitions and underlying top-line growth was a more modest 2 per cent. Given the market backdrop, investors should expect more of the same. "The best time to buy is a time like now," chief executive Bruce Thompson told the Investors Chronicle, adding: "Growth for many of our targets is slow and hard won, and owners feel unsure that their business will be worth more next year."

IC TIP: Hold at 765p

In the six months to March 2016, £30.2m was spent acquiring UK-based cable accessory group Cablecraft and Australia-focused gasket and seals specialist WCIS. The latter, which was snapped up in October 2015 for around £10m, helped to boost adjusted operating profit by 12 per cent in the seals division, although this resulted in a 1.7 percentage point reduction in the adjusted profit margin. Margin pressure was also evident in the life sciences business, which has been hit by squeezed state budgets in Australia and Canada.

Despite these pressures, a fall in working capital investment has led to an 85 per cent jump in free cash flow to £23m. If that momentum is maintained, analysts at Numis reckon Diploma's balance sheet could be debt-free by September, providing more headroom for acquisitions. Numis also forecasts a pre-tax profit of £62.5m this financial year, giving EPS of 40p, up from £59.6m and 37p in 2015.

DIPLOMA (DPLM)

ORD PRICE:765pMARKET VALUE:£865m
TOUCH:767-769p12-MONTH HIGH:847pLOW: 603p
DIVIDEND YIELD:2.4%PE RATIO:24
NET ASSET VALUE:182p*NET DEBT:8%

Half-year to 31 MarTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201516326.016.25.8
201617925.616.06.2
% change+10-2-1+7

Ex-div: 26 May

Payment: 15 Jun

*Includes intangible assets of £169m, or 149p a share.