Tuesday, May 17, 2011

DPLM.L - Diploma - Good interims

Business activities

DPLM.L (Diploma) has three divisions:
  • life sciences: making measuring kits and other items for the healthcare and environmental industries
  • seals: gaskets, cylinders and industrial machinery
  • controls: specialist wires, connectors and fasteners
It is headquartered in London, but most of its operations are in North America and continental Europe.

Interactive Investor produced a video on on DPLM recently, in which it cheekily referred to its trading activities as "a random business" collection, and an "old-fashioned British combine dating back to 1931 that's seen more restructurings than Joan River's face". Don't let that put you off, though, as they wind up by saying that the stock still looks good value and shows long-term potential.

Recent update

DPLM (Diploma) has issued a nice half-yearly report today. Note that a trading statement was made back in March, so the market knew what to expect in this report. Comparing 6 m/e 31 March 2011 to 6 m/e 31 March 2010, revenues are up 31%, operating profits are up 51%, and operating margins are up, too. Interim dividends are up 25%. Improvements were noted in all three divisions. Shareholders can be very pleased with that result. Net debt is £1m, compared with a net cash position at the finals stage of £30m. The group spent £27m acquiring businesses and £11m in dividends during the period. The balance sheet remains strong.

The directors report a confident outlook, and expect that the strong performance in H1 will continue in H2, although comparitives are becoming tougher.

What the bulletin boards are saying

Richard Beddard shared his thoughts on 9 May:
  • looks like a superior business that will continue to earn high returns
  • it has performed well in a recession because most sales have come from consumables
  • its products are specialised, so it isn't easy for customers to switch
  • while some companies remain competitive for decades; most succumb to competitive pressure sooner. The odds are against Diploma
Ultimately, he doesn't like the price at 2.5X BV and 27X 10-year average earnings, based on a share price of about 274p at around that time. The shares currently stand at 360p, giving it a market cap of £411m.

Discussion on DPLM is rather thin, but one bullish investor noted the following at the end of December 2010:
 As a long term Diploma Investor I have learned to just sit back and watch, make the odd irelevant comment and generaly [sic] smile. Its just one of those strong shares that everyone has in their potfolios and we all wish we had more.Fundamentals are V good, reputation in the industry is A1 and management is solid. I watch some shares go up and down like West Ham but not this one. Just lie back and smell the Roses.

Director transactions

It is difficult to divine much meaning in the directors dealings. In January, 3 directors cashed out their options to the tune of £195k at 276p. In February and March, 3 directors made purchases totalling £182k at prices in the range 276p-299p.

The numbers

As already noted, the balance sheet for DPLM is still strong, so no worries there. Interest cover is nearly 17, and the company also does well on z-score and gearing measures. DPLM has spent £70m in acquisitions over the last 5 years, during which EPS rose from 10.48p in 2005 to 18.90p in 2010, for a compound annual return of 12.5%. Looking over the period of a decade using a least-squares exponential fit, the rate of growth in EPS was 15% pa, with a "coefficient of determination" of 95% - suggesting that its EPS has been growing in a predictable way, rather than being subject to a lot of wild variation. Operating profits have grown at a rate of about 16.5% pa with similar regularity. ROE has been about 15%, made more impressive by the fact that it was achieved with a strong balance sheet rather than a highly-indebted one.

Dividend cover is 2.3, and current yield is 2.8% (based on a share price of  360p).

During the decade, DPLM only had two years when earnings contracted: 2002 and 2009. 2002 was preceded by a very strong growth in 2001 of 68%, and 2009 was followed by a strong growth of 28% in 2010. So it appears to be a good stable business not easily buffetted by economic upsets.

Turning to valuation metrics, it has an EV/EBITDA of 11.5, just slightly over the market average of 10.7. PER tells a similar story, at 15.8 compared with the market of 13.9. Figures were taken from SharelockHolmes, and incorporate the recent results. Benchmark statistics were computed by me (so you've been warned!) using median figures of companies with market caps over £200m, excluding investment trusts.

The verdict

I concur with Interactive Investor's conclusion that it shows "long-term potential". The company has demonstrated a solid performance over the last decade, with acceptable returns on equity, balance sheet position, and rates of increases in EPS. Prospects look good, and if the company continues to do as well as it has done in the last decade, investors should be well-rewarded. Valuations look in line with the market, and don't appear to be stretched. Given current valuation levels, the market seems to have recognised the merits of the company, so I wouldn't expect a short-term pop out of it. However, I would expect a portfolio of say a dozen such companies of similar quality at similar valuations to give investors a satisfactory performance.

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