Sunday, 17 May 2015

Diploma interims

Diploma PLC

An international group of businesses supplying specialised technical products and services. They operate globally in three distinct sectors - Life Sciences; Seals and Controls. I have a holding in my growth portfolio (epic code: DPLM). 

Diploma announced their interims on 11 May, showing a revenue increase of 9.8% to £163.2m and organic growth of 2%.  Acquisitions added 10% to revenues, but foreign exchange headwinds had a 2% adverse effect on revenue.

By division organic growth was:

Life Sciences +1% (Canadian Healthcare faced difficult markets)

Seals +8% (North American market strength)

Controls -5% (Soft European industrial markets)

Adjusted operating profit (eliminating acquisition related charges) increased by 6.5% to £29.6m, with adjusted operating margin at 18.1%, down from last year’s 18.7%.  Reported operating profit was up 6.1% to £25.9m.

Adjusted EPS increased by 6.3% to 18.6p and reported EPS was up 8.7% to 16.2p.

An interim dividend of 5.8p was declared an increase of 7.4%, that management said reflected their confidence in growth prospects.

Free cash flow (FCF) was £14.1m marginally down on last year's £14.7m, this decline was due to a capital spend that at £2.8m was £2m higher than last year.  Of this capital spend £1.1m was due to the construction of a new warehouse and office facilities for FPE Seals, a further £2.1m will be spent by August this year when it will be completed and then sold and leased back by the business. 

The business finished the period with net debt of £14.9m compared to £21.3m of net cash at the year-end; this was mainly due to dividend payments of £13.1m, share repurchases of £1.7m and acquisition payments of £34.4m substantially exceeding FCF.  Excluding an further acquisitions, the net debt should be eliminated within 12 months due to the highly cash generative nature of the business - producing an ~25% FCF return on its capital employed. 

Management's outlook stated that Diploma "...aims to deliver "GDP plus" organic revenue growth with carefully selected acquisitions accelerating the growth to the target double-digit level. While headwinds to organic growth remain in certain key markets, the acquisition pipeline remains encouraging..."

The shares at 810.5p were down 4.3% on the week and 11.6% short of its 52 week high.  A high quality cash generative business, that very rarely trades at a substantial discount to its intrinsic value.  I would currently assess its intrinsic value at 850 - 900p, based on being able to grow its FCF by 10% pa over the next 10yrs and 3% in perpetuity.  Since the 10 year FCF growth is dependent on acquisition success, I have used a higher discount rate of 9.5% than might be used for a similar sized company with a comparable beta, to reflect the execution risk.


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