Interactive Investor

This FTSE 100 wannabe is an ‘exceptional growth opportunity’

13th July 2023 15:58

by Graeme Evans from interactive investor

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If it keeps this up, the UK’s blue-chip index will have a new member at the next reshuffle. City writer Graeme Evans runs through latest results and other news.

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The seals and controls business Diploma (LSE:DPLM) boosted its blue-chip credentials today by unveiling another strategic acquisition alongside further strong trading.

At over £4 billion, the company whose solutions serve industries from energy and infrastructure to healthcare, is in the running for promotion to the FTSE 100 index at the next reshuffle.

The shares today rose 128p to 3,092p after Diploma revealed the £170 million acquisition of a “high-quality” business in Spain as it expands its US and UK-focused aftermarket fluid power capabilities across continental Europe.

Diploma said the purchase will be earnings enhancing and exceed cost of capital from day one, while offering good exposure in key markets such as France and Germany.

Chief executive Johnny Thomson said: “This deal continues our strong track record of acquisitions that drive organic growth at great returns."

In its previous four financial years, the £840 million invested in 31 acquisitions went on to deliver average organic growth of 15% and returns of more than twice the cost of capital.

Today’s latest move follows a £76 million strategic acquisition in March entering the US industrial automation end market, as well as eight bolt-ons worth a total of £26 million.

The 8% contribution from acquisitions net of disposals helped to lift revenues by 21% in the first nine months of Diploma’s financial year, with 4% coming from currency benefits.

Diploma said the underlying nine-month growth rate of 9% was broad based and volume-led, with operating margins on track to meet full year guidance around 19%.

The largest division of controls, which supplies specialised wiring, cables, connectors, fasteners and adhesives for technically demanding applications, continues to see strong growth.

The seals sector businesses supply a range of seals, gaskets, cylinders, components and kits used in heavy mobile machinery, while the smaller life sciences arm provides equipment, consumables and instrumentation to the healthcare industry.

Today’s acquisition and update prompted Numis Securities to upgrade its earnings per share forecasts by 3%-4%.

The broker, which has a target price of 3,700p, said Diploma was increasingly positioned behind structurally growing end markets and had deepened its penetration of large, developed regions.

It said today: “We believe Diploma offers exceptional compounding structural growth opportunity.”

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