Diploma is an anonymous name for a fairly anonymous business, distributing a range of controls, seals and other devices to a selected number of industries, from Canadian and Australian healthcare to the European automotive sector. It is one of those companies that operates under the radar of most investors, but those that have followed my advice and bought the shares in the past few years will have little to complain about.
They were sitting at 230p or so five years ago; they fell 55p to 792p yesterday after some cautious comments on the outlook and indications that growth, for perfectly good reasons, was beginning to slow.
Diploma aims to raise revenues by GDP and then a bit, which means that organic growth rate is muted at a time when inflation is pretty well zero in those markets. It aims to increase this revenue growth into the double digits by selected infill acquisitions. These generally are of small private companies and the willingness of their owners to sell is conditional on the general trading environment.
Bruce Thompson, the chief executive, described trying to buy such businesses in 2013 as “wading through treacle”. The uncertainty dissuaded those sellers, so the growth from acquisitions today is more muted. By contrast, Diploma spent £35 million on two deals in the first half of its financial year, to the end of March, more than twice the total in the previous year, and the company is confident of a good flow going forward.
Revenues for the first half were up a relatively muted 2 per cent, then, although 3 per cent looks achievable in the second half. The different markets where Diploma operates are always going to be moving in different directions. In the United States, the seals business achieved underlying revenue growth of 8 per cent — the company is not much exposed to the oil and gas sector. The Canadian and Australian healthcare sectors are reacting to the weakness in those countries’ mining sectors by cutting back on costs. The European industrial sector is plainly weaker.
The shares sell on 21 times’ earnings. Not cheap, but that share price fall looks like a buying opportunity.
Revenue £163.2m
Dividend 5.8p
Operating margin in first half 18.1%
MY ADVICE Buy
WHY Shares are by no means cheap, but the long-term growth record is excellent and the share price fall looks like a good buying opportunity
The Russian exhibition market, where ITE Group gets 60 per cent of its revenues, has stabilised, with average takings down by as much as 40 per cent since the sanctions and the effect of the low rouble started to have an impact, but no one is predicting when that market will recover.
ITE has done what it can to lessen the damage by cutting costs, while acquiring other events outside Russia to diversify its source of income, in Turkey, South Africa and the global Breakbulk set of exhibitions catering for the transport industry. The chances are that in future Russia will account for only 40 per cent of all earnings — but it is still going to be important and that recovery will rely on political factors well beyond the company’s control, although a more stable rouble will help for now.
The shares, which have plunged from more than £3 at the start of last year, rallied 6¾p to 193¾p amid some optimistic noises, despite a fall in pre-tax profits from £12.2 million to £7.8 million in the first half to the end of March. The dividend is held at 2.5p and is well enough covered, offering a yield of just below 4 per cent, but on 13 times’ earnings the shares look best avoided for now.
Revenue £56.1m
Dividend 2.5p
MY ADVICE Avoid for now
WHY Recovery in key Russian market some way off
Lonmin has taken the view that the platinium price is not going to recover over the next two years, and the chances are it is right.
The cost of mining the stuff was running at about 10,500 rand (£560) in the first half to the end of March and the achieved price was about 11,260 rand. That does not leave an awful lot in the kitty for the sort of capital spending that Lonmin needs.
The world’s third-biggest platinum producer has responded on two fronts. It has cut back that capex, which four years ago was running at $450 million, to $160 million in the current year. It has entered into discussions with the unions to cut about 10 per cent of the workforce, or 3,500 jobs.
The first half was affected by problems at its smelter, which cut production from almost 140,000oz to 122,500oz and left large amounts unprocessed. Lonmin is convinced that the shortfall can be made up in the second half and is shooting for 750,000oz for the full year and for the next one.
Last year was hit by furnace problems as well and by a long strike. Go back to 2012-13 and production was running at 709,000 tonnes.
The shares fell 1½p to 140½p in a market where there are some doubts that the production target can be met. The payment of dividends, suspended when the financial crisis hit, is no closer than it seemed a couple of years ago.
On the positive side, Glencore’s 24 per cent stake is being handed out to investors, removing the potential overhang. I would still not be buying shares in the platinum producers now, though.
Expected capex this year $160m
MY ADVICE Avoid for now
WHY Platinum price shows no signs of recovering
And finally...
A note from Citi indicates enthusiasm at the prospects for Bodycote, the specialist engineer, which has been moving into higher-margin technologies. This will allow the company to increase earnings in a low-growth industrial environment, Citi says, while there is also the potential for further returns to investors — the company has a strong record of paying special dividends. I tipped the shares at the start of the year; they have come off a bit, but added a few more pence yesterday, to be up by 9 per cent so far this year.
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