Companies: DPLM   

Specialist international distributor Diploma serves the life sciences, hydraulic seals, and controls markets. Its life sciences arm distributes instruments to research, development and diagnostic laboratories, the seals operations deliver hydraulic seal kits and gaskets for repairing JCB diggers, whilst controls distributes wiring and control devices.

Over the past five years, Diploma has delivered decent organic growth, with a large shot in the arm delivered through a flurry of acquisitions. Encouragingly, chief executive Bruce Thompson has just reported another year of double-digit profits growth and strong cashflow to September. Underlying pre-tax profits perked up 27% to £16.6m on a 11% sales hike to £111.3m (£100.5m). Pre-tax profits eased to £15.3m (£15.4m) – however, the 2004 numbers enjoyed £3.9m of exceptional gains on the sale of land. Thompson rewarded shareholders with an 18% dividend hike to 20p a share.

Shedding light on the numbers, he claimed sales and profits growth was driven from a full year’s trading from 2004 acquisition Somagen, the Canadian life sciences distributor that took Diploma into the clinical diagnostics market. He also pointed to a handsome performance from North American seals concern Hercules Bulldog – both benefited from favourable North American markets. Another financial highlight was bumper free cashflow – some £11.9m last year – helping lift year-end cash by £7.8m to £25.7m.

Although the UK and Germany remain tough, Diploma is reveling in buoyant and growing North American markets. The strategy is to invest in specialist distribution businesses with long-term growth potential, where quality customer service, technical support and value-adding activities can drive superior margins. Adding further thrust to the investment case is planning permission for land at a former brickworks site in Lincolnshire. In the books at next to nothing, this land disposal should yield ‘not less than £9m’.

As well as offering investors exposure to distribution concerns with both sector and geographical diversity, countering cyclicality, Diploma is also a decent asset play. Buy.

Diploma	LSE	£130.23m	115.00p	10.00p
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