Morning Note: Market news and strong results from Diploma.

Market News

This morning in Asia, markets were mixed, with sentiment influenced by poor Chinese data and optimism over reports the country will start selling ultra-long bonds: Nikkei 225 (-0.1%); Hang Seng (+0.6%, to the highest since August); Shanghai Composite (-0.2%). The FTSE 100 is currently little changed at 8,440. The S&P 500 futures currently predict the US market to rise by 0.2% at the open this afternoon. Gold currently trades at $2,348 an ounce, while Sterling buys $1.2523 and €1.1625.

Trade tensions continue, with Joe Biden expected to increase levies on some Chinese goods this week, some of them quadrupling, people familiar said. Duties on EVs will rise to 102.5% from 27.5%. The scope of the other increases isn’t clear. Solar manufacturing equipment is poised for an exclusion.

The oil price fell back to $82.70 a barrel as traders assessed weak Chinese data and OPEC+ policy. Meanwhile, China is replenishing stockpiles of coal and natural gas amid falling prices. Gas imports through the end of April jumped 21% from the previous year, while coal purchases climbed 13%.

The UK Government is speeding up its plan to dispose of its NatWest stake, while investors in Anglo American have told the company to move faster to survive a bid from BHP. They want the miner to detail its turnaround plan and explain how it will create more value than by just selling to BHP.

According to an MLIV Pulse survey, Nvidia and Apple rival gold as a shield against rising prices. The precious metal is seen as the best safeguard against inflation but nearly a third of respondents said the tech giants are their first pick for the role.

Source: Bloomberg

Company News

Diploma has this morning released strong half-year results and upgraded its guidance for the financial year to 30 September 2024. In response, the shares are up 7% in early trading.

Diploma operates a decentralised collection of distribution businesses which supply specialised industrial and healthcare products and services to a wide range of niche end markets, in which service, rather than price is the key reason business is won and retained. The focus is on the supply of low cost, but essential products, such as a seal for a hydraulic cylinder. Most of the revenue is generated from consumable products, usually funded by the customers’ operating budgets rather than their capital budgets, providing a recurring revenue base. By supplying essential solutions, not just products, Diploma has built strong long-term relationships with its customers and suppliers, which support attractive and sustainable margins (in the high teens) and consistently strong cash flow.

The strategy is to build high-quality scalable businesses that deliver sustainable organic growth. Acquisitions are an integral part of the strategy, with a disciplined focus on acquiring value-added businesses in fast growing niches, with great management teams, to accelerate organic growth and generate attractive returns on investment.

In the six months to 31 March 2024, reported revenue growth grew 10% to £683m, including an 8% contribution from acquisitions and a 3% foreign exchange headwind. Organic revenue growth was 5%, in line with the group’s 5% financial model. Growth was broad-based and mainly volume led, with good momentum into the second half.

In Controls, the group supplies specialised wiring, cable, connectors, fasteners, and control devices used in a range of technically demanding applications. In the first half, the division generated organic revenue growth of 7%, with strong growth in International Controls with structural tailwinds and market share gains. Windy City Wire delivered sustained, volume-led growth in line with the group average.

In Seals, the group supplies a range of seals, gaskets, filters, cylinders, components, and kits used in heavy mobile machinery and specialised industrial equipment. During the period, performance was resilient (+1%) against a backdrop of customer destocking. Normal ordering patterns are starting to resume, and the group expects a stronger second half.

The Life Sciences business supplies a range of consumables, instrumentation, and related services to the Healthcare and Environmental industries. The division grew by 5%, with end market dynamics now largely normalised post-pandemic, underpinning strong performance in Canada and Australia.

The adjusted operating margin expanded by 80 basis points to 19.6%, reflecting the group’s value-add proposition, operational leverage, disciplined cost management, and accretive acquisitions. Adjusted EPS grew by 10% to 65.1p.

Free cash flow was strong, up 28% to £66.3m, with conversion of 76%, reflecting continued disciplined working capital management. Financial gearing rose from 0.7x net debt to EBITDA to 0.9x, albeit still well below the 2.0x target.

Diploma has a progressive dividend policy with a target cover of two times adjusted EPS. With today’s results, the group has declared a half-year payout of 17.3p, up 5%, reflecting confidence in the group’s growth outlook and prospects.

Acquisitions continue to be an integral part of the group’s growth strategy – during the half year, six deals were made for a total consideration of £284m. The largest was Peerless Aerospace Fastener (for £236m) which extended the group’s established position in aerospace specialty fasteners and accelerated organic growth through product and geographic expansion. The group remains disciplined in its approach to acquisitions and has a strong pipeline diversified by sector, size, and geography.

Whilst the company remains mindful of the ‘challenging market environment’, a resilient business model, coupled with the strong start to the year, mean management has lifted its full-year guidance:

-          organic revenue growth of 6% (vs. 5% previously).

-          recent acquisitions will add 10% to reported revenue growth.

-          operating margin of 20.5%, a big step-up from last year’s 19.7%, versus previous guidance for a flat margin. The upgrade was driven by strong underlying performance and recent acquisitions.

-          free cash flow conversion of 90%.

Source: Bloomberg