Diploma plc – Strong Quarter, Acquisitions To Boost Earnings

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Diploma PLC (LON:DPLM) have reported organic revenue growth of 9% for the 3rd quarter of their financial year, a pace somewhat ahead of their guidance for progress in the second half as a whole. Growth was strong across the board, with all three divisions delivering positive outcomes.

With an 8% boost to revenues from acquisitions made in the last year, and a 4% gain from currency swings, Diploma reported total revenue growth of 21%. The group also announced the acquisition of DICSA, a distributor of fluid power solutions into the European Seals aftermarket for £170m. Recently acquired TIE, for which Diploma paid £70m earlier this year, is said to have traded well since purchase.

Diploma say that their business model continues to add value for their customers, who make repeat purchases as a result, which is leading to a strong operating margin outcome for the year, suggesting profits could be rising ahead of the pace of revenue growth.

Diploma’s Consitent Organic Sales Growth

Steve Clayton, head of equity funds at Hargreaves Lansdown:

“We hold Diploma in our HL Select UK Growth Shares fund precisely because of the group’s ability to keep churning out the consistent organic sales growth they have reported today, boosted by a regular flow of bolt-on M&A deals.

The added-value distribution model gives the group pricing power, allowing it to hold and grow margins even at a time of inflationary pressure. The balance sheet is in fine shape, with leverage still modest even after today’s news of the addition of DICSA to the group.

At the heart of Diploma’s business model is a relatively capital-lite operating structure, which allows the group to earn high returns on investment, with the group forecasting an 18% return on tangible capital for the year. This combination of high returns, consistent growth and M&A activity adds up to a powerful business model, reflected in the group’s high shareholder returns in recent years.”