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Diploma’s market knowledge pays off

Decent operating margin maintained on higher sales
November 21, 2022
  • Company spends £187mn on seven acquisutions
  • Two more deals for £5mn done since year-end

Management at distributor Diploma (DPLM) appear to have applied their industry knowledge well over the past year.

Results for the 12 months to the end of September show that the company maintained an adjusted operating margin of 18.9 per cent on revenue growth of 29 per cent.

A 15 per cent increase in organic revenue was the main momentum driver, as the company raised prices to offset inflationary pressures.

Chief executive Johnny Thompson said there was “still more to do” in this area, given ongoing wage inflation.  All three of its divisions – controls, seals and life sciences – recorded top-line growth, although margins weakened in the latter.

The company made seven acquisitions during the year, spending £187mn in the process. Funding these deals as interest rates rose pushed up the company’s net interest charge by 70 per cent to £11.6mn. It has fixed rates on about half of its obligations, though, and its year-end leverage of 1.4-times cash profit is “well below" limits in its financial model, Thompson added, pointing to good levels of cash generation.

Diploma grew cash flow from operations despite more than doubling working capital as it increased stocks. It expects “to carefully manage inventories down over the coming months”, Thompson said.

The company’s shares are down by around 15 per cent this year, given broader market uncertainties. However, they remain highly rated – they trade at around 25-times broker Peel Hunt’s adjusted earnings share forecast of 114.5p per share for its current financial year. Its PEG ratio, a measure of how much investors pay for growth, is also high at 2.4-times.

In a market as uncertain as the current one, it's easy to see why. Thompson highlights its diversified sources of revenue and exposure to “structurally growing end segments” such as diagnostics, technology, renewables and infrastructure. Its components do not represent a huge cost to customers but feed into critical parts of their business and are generally paid for out of operating budgets. This means it has a fairly defensible position in a market where many peers are affected by cyclicality. Indeed, weakness elsewhere could present more buying opportunities – it has spent a further £5mn on two bolt-on acquisitions since its year-end and describes its current pipeline as “encouraging”.

Diploma expects its operating margin to remain in the 18-19 per cent range and given its long-term record – adjusted EPS has increased at a compound rate of 15 per cent over the past 15 years – it has the required credentials as a decent home for investors’ capital. Buy.

Last IC View: Buy, 16 May 2022

DIPLOMA (DPLM)   
ORD PRICE:2,878pMARKET VALUE:£ 3.6bn
TOUCH:2,844-2,880p12-MONTH HIGH:3,504pLOW: 2,090p
DIVIDEND YIELD:1.9%PE RATIO:38
NET ASSET VALUE:531p*NET CASH:60%
Year to 30 SepTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20180.4972.747.525.5
20190.5583.554.729.0
20200.5466.743.530.0
20210.7996.656.142.6
20221.0113076.153.8
% change+28+34+36+26
Ex-div:19 Jan   
Payment:03 Feb   
* includes intangible assets of £827mn, or 664p a share