‘Strong market conditions’ will mean modestly higher than expected half year revenues from Diploma (DPLM), the company confirmed on Wednesday. The FTSE 250 technical products supplier now anticipates interim sales around 8% higher than last year, when it reported £217.3m of revenue for the first six months.
This is in spite of ongoing currency headwinds as the pound continues to strengthen against the dollar, which is likely to act as a rough 4% drag on first half growth. About 5% of sales progress comes from acquisitions.
Diploma was recently selected in Shares ‘10 stocks for your ISA’ feature thanks to its resilient and widely spread business. The company supplies seals, wiring and cabling components plus pathology and blood testing consumables among other things.
OPERATING BREAKDOWN
Its biggest seals business grew revenue by around 8% on an underlying basis in the period to 31 March 2018. This was largely thanks to a North American market that remains robust.
Its life science division also grew by 8%, albeit versus a weak first half last year, due to a strong performance by Abacus. It is the Australian diagnostics business acquired last year.
The controls division only grew by 3% although this is due to a tough comparative prior year when it grew by 18%.
Adjusted operating margins may be flat but remain impressive running at around 17%. There may even be room for modest improvement if prices rises can be passed on to end users, although the company has had limited success on this so far this year.
CASH GENERATION
Net cash of about £16m at 31 March 2018 will be well down on the £22.3m of a year ago although this does include a hefty hike in working capital to support the much stronger trading.
With around half of growth stemming from acquisitions over the past decade investors will be encouraged that management see a ‘healthy pipeline of opportunities’.
Will Kirkness, analyst at investment bank Jefferies, likes the consumable nature of Diploma's products which keep customers coming back for more. ‘This is a high-quality business,’ he says.
Diploma's share price remains largely flat at £11.31 in late morning trade on Wednesday. That the stock is trading on about 20-times the 56p of earnings per share forecast for next year, to September 2019, may explain why.
Even more so given the limited income attractions, on a 2019 implied dividend yield of less than 2.4%.
