UK distributor Diploma (DPLM) sees its shares jump 6% to £13.70 after reporting forecast-beating final results for the year to 30 September.

Despite a recent modest rally in the pound revenues rose 7% on a like-for-like basis while operating profits increased 9%, helped by improved margins.

Diploma, which sells a wide array of technical components into construction, engineering, life sciences and aerospace markets, has benefited from strong industrial demand, particularly from the US and in Europe.

Underlying revenues in the Seals unit were up 10% driven by original equipment and after-market sales in the US although the strong pound knocked 3% off the growth rate.

The Controls unit, which supplies specialist wiring, cables and controls to aerospace, defence and industrial companies, reported slower underlying growth but a couple of acquisitions helped to generate a 9% increase in sales.

Diploma also has a Life Sciences unit which supplies instruments and other precision equipment to hospitals and healthcare operators.

Like Controls, underlying growth was slower than in Seals but was boosted by a couple of percentage points by small acquisitions.

QUIETLY GOING ABOUT ITS BUSINESS

Diploma often flies under the radar of many investors and seldom grabs headlines. Yet it is at times of uncertainty, like now, that the company's steady growth approach and successful track record tends to get attention.

For example, earnings per share (EPS) has grown at a double-digit rate each year of the past decade. This has helped deliver total returns for shareholders (capital plus dividends) that far outstrip the wider markets.

Over 10 years Diploma's total return stands at 1,090% (with dividends reinvested) compared with 156% for the FTSE 100.

One of the big advantages of Diploma’s business is how resilient it is in downturns when other suppliers tend to struggle.

In the case of seals and gaskets, customers like construction and mining firms are always replacing worn-out parts to keep what are typically fairly expensive pieces of machinery working.

When there is a downturn and customers have to cut back on buying new diggers and bulldozers, they try to extend the life of their existing kit by repairing it which still means orders for Diploma.

One of most impressive things about the business is that it almost runs itself. In fact since August the firm has been without a chief executive yet the senior management have kept up the day-to-day running of the business and made another bolt-on acquisition.

VALUATION AND BREXIT RISKS

Diploma’s return on capital employed (ROCE) has consistently been around 25% which is impressive but this kind of performance comes at a price.

At current levels the stock is trading on a forward (to 30 September 2019) price to earnings (PE) multiple of around 25, and on an earnings yield of roughly 4%.

Like so many other UK businesses, while uncertainty continues to swirl around Brexit, it leaves Diploma somewhat exposed. For the time being the company insists that the timing and nature of the UK’s exit from the EU has yet to exert any meaningful impact.

But management do accept that disruption down the line, and further sterling weakness, could hurt sales and and drive costs up, which would not be great news for profits. About 26% of revenue comes from the UK, the rest is all overseas.

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Issue Date: 19 Nov 2018