Precision Delivering Results
SPECIALTY PRODUCTS AND SERVICES
Diploma PLC is an international group of businesses supplying specialised technical products and services. The company acts as a value-added distributor of products sourced from third parties. The high value-add business model produces strong operating margins – 17-19% in the last 5 years. We consider some of the differentiators:
THREE SECTORS:
The Life Sciences division operates principally in the healthcare sector, supplying medical devices and related consumables, but also has a presence in environmental analysis equipment. Suppliers are often mid-sized medical tech organisations that don’t have a broad distribution capability of their own.
The Seals division supplies a variety of different seals and sealing products and related components, for heavy mobile machinery (excavators etc.) and for specialised industrial equipment.
The Controls division supplies wiring, harness components and fasteners, and also temperature, pressure and fluid controls. Applications include aerospace, motorsports, healthcare and industrial equipment.
Across the three divisions Diploma provides a differentiated offering to the end customer. This includes deep technical knowledge and support, highly responsive customer service including next-day delivery, and value-added activities such as preparing groups of components as a ready-to-use kit.
STRATEGIC OBJECTIVES
There are five key pillars to the group’s strategy:
GDP+ organic revenue growth – Focussed on essential products and services, funded by customer opex budgets not capex.
Sustainable attractive margins – Essential solutions combining customer service, technical support and value adding activities.
Acquisitions – Value enhancing acquisitions accelerate growth and expand strategic reach.
Strong cash flow – Underpins dividend growth and an ungeared balance sheet.
Value creation – Consistently exceeding 20% ROATCE (return on adjusted total capital).
On p2 we present some metrics demonstrating how the group is delivering on each of these objectives. We argue that the company is well placed to continue delivering shareholder value.
The chart above focusses on elements 1) and 2) of the five strategic pillars – Growth and profitability.
Diploma is on track for organic revenue CAGR of 4.9% over the period (including our own 2018e forecast), with acquisitions taking the total CAGR up to 11.8%.
Operating margins have been consistently strong, in the range 17-19% over the period.
The table below focusses on points 3), 4), and 5) of the strategic framework – items relating to capital management and value creation.
Strong cash flow underpins the other metrics. The cash conversion ratio (FCF / Adj. net profit) has averaged 101% over the period, and this has enabled the company to retain an unleveraged balance sheet and to keep growing the dividend. Our 2018e cash balance forecast assumes no further acquisitions, although we would hope that opportunities will present themselves during the year.
The strong cash flow also enables the acquisition strategy. The value creation in the acquisitions is evident from the fact that acquisitive growth is achieved without diluting the group’s return on capital.