Diploma targets return to growth

Technical products specialist Diploma (DPLM) has felt the impact of Covid-19 across all of its operating segments – soft industrial markets in the larger seals business, civil aerospace weakness in the controls division and postponed routine medical procedures in life sciences. Yet despite these pandemic pressures, revenue only dipped 1 per cent to £538m in the year to 30 September. While organic revenue fell by 7 per cent, this was offset by 7 per cent growth from acquisitions. 

Adjusted operating profit dropped more severely, with the margin contracting by 1.6 percentage points to 16.2 per cent. This reflects the cost of migrating to a new automated US distribution facility for seals, and negative operational leverage and restructuring charges in controls division.

The latter faces a more promising outlook following the $450m (£341m) purchase of low-voltage wire and cable distributor Windy City Wire (WCW) in October. The acquisition is expected to boost group revenue by around a quarter in 2021, although it has pushed Diploma from £207m of net cash - excluding lease liabilities - at the September year-end into net debt. Still, free cash flow jumped by almost 30 per cent during the year to £73m and the dividend has been increased.

As momentum picks up across the business, the group is guiding to “mid-single digit” organic revenue growth next year and a return to historic operating margins of around 17-18 per cent. House broker Numis anticipates adjusted operating profit of £124m in 2021, rising to £134m in 2022.

While a forward price/earnings multiple of 32 is pricey, Diploma has demonstrated resilience during this crisis and its long-term prospects are underpinned by structural growth drivers, such as the digitalisation of infrastructure. Buy.  

Last IC View: Buy, 2,200p, 08 Oct 2020