Diploma - a high price for steady growth

Diploma: This is one of those companies that has a low profile, but which ticks along very nicely thank you. In simple terms they supply bits and bobs into three main market segments being Life Sciences (e.g. consumables and instrumentation), Seals (including gaskets and cylinders) and Controls (e.g. connectors, fasteners and control devices). Their main driver is global GDP growth, but they augment this by, frequent, small-ish bolt on acquisitions. Almost half the revenues come from North America, with just over 40% from Europe and the balance from the Rest of the World. Today’s interims to 31^st March 2015 show revenue up 10%, pre-tax profit up 6%, eps up 6% at 18.6p and a 7% dividend hike to 5.8p. That 10% revenue growth was all down to acquisitions with underlying growth of 2% offset by currency movements. Free cash flow was down 5% to £12.4m due to a £2m increase in capex, whilst acquisition spending hit £35m, double that for the whole of FY2014. Net debt at period end was still a very modest £14.9m despite the acquisition splurge, although previously they did have net cash of £21.3m at the time of the Finals. Within the divisions, Seals was helped by a strong US market, but overall the generally weak European industrial markets were unhelpful.

Looking ahead most people would see the US recovery as fairly well established now, although Europe is still very patchy indeed. So the broad economic backdrop of the first half looks set to stay through the second half. They state that the acquisition pipeline remains “encouraging”. So, extrapolating, last year’s £56.2m pre-tax profit growing at 6% becomes £59.6m, a bit below (toppy looking?) consensus of £61.6m. Likewise 36.1p of eps growing at 6% becomes 38.3p, which is a chunky PE of 21.3x at today’s soggy 815p. The 7% interim dividend hike points to a twice covered full year dividend of 18.2p, for a skinny yield of 2.2%. There is no doubt that Bruce Thompson (CEO) and Nigel Lingwood (FD) have done great things at Diploma, with the shares rising from c135p ten years ago to 815p now. However, even given the reliability and steadiness of growth, these multiples are now looking full to me. So I would not be a fresh buyer of the shares today. (Neil Cumming^, 11^th May 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower