An acquisitive Diploma returns to strong growth

Diploma (DPLM) has exceeded its financial targets, reporting strong profit and revenue growth across its three business sectors. The technical product specialist is now eyeing up more acquisitions and diversification opportunities, as it seeks to expand in the ‘under-penetrated’ UK, US and European markets.

Diploma’s core sectors – seals, controls, and life sciences – all enjoyed underlying growth in 2021, following a Covid-induced industrial slowdown in 2020. Underlying revenue growth across the group has increased 12 per cent year on year, while operating profit has shot up by almost 50 per cent to £104m. 

The controls division, which supplies wiring and cables and accounts for over two-fifths of the company’s total revenue, almost tripled its adjusted operating profit, while its adjusted profit margin has risen to over 20 per cent. Management said growth was driven by a recovery in demand and the "outstanding performance" of Windy City Wire, which it acquired late last year.

Growth is also strong elsewhere. Diploma’s life sciences business, which suffered last year when elective surgeries were postponed, has recovered well, albeit held back by capacity constraints in Canada and ongoing lockdowns in Australia. Management said the backlog of surgeries will take time to unwind given the pressure on healthcare systems, underpinning mid-term growth for the businesses.

Diploma is not immune to macroeconomic volatility: the company is still grappling with supply chain disruption, inflation and labour pressures – who isn't? However, profit margins continue to widen, and pressures have been partially offset by price rises. Management is also confident that its civil aerospace work – which has been impacted by restrictions on air travel – will recover well, noting a "sharply improving trajectory since the half year".

Expansion and diversification are now a priority. This year was a busy year for acquisitions, with Diploma spending £456m on 10 businesses to accelerate growth. "Fragmented markets" mean there are "significant" opportunities for more acquisitions going forward,  management said. Organic revenue initiatives also gained "good traction" in 2021, with new products expanding the company’s addressable market. 

Meanwhile, dividends are still rising, with management announcing a total dividend for the year of 42.6p, up from 30p in 2020. Diploma has raised its dividend every year since 2004.

The group now trades at 37 times forecast consensus earnings, an indication that the market is pricing in potential upgrades. Investors need to take account of how the newly acquired businesses are integrating and their eventual impact on cash flows, margins and debt financing. We reiterate our view that secular trends, such as the increased digitalisation of infrastructure assets, should underpin revenue growth over time. Buy. 

Last IC view: Buy, 2,250p, 16 Nov 2020