Diploma LON: DPLM said third-quarter trading remained strong, with Chief Executive Johnny Thomson reporting 15% organic growth and continued momentum from the first half of the year.
On the company’s Q3 trading update call, Thomson said the performance reflected broad-based strength across parts of the portfolio, particularly in Controls, while Life Sciences continued to face tougher market conditions. The company also raised its full-year outlook, citing stronger organic growth and higher expected margins.
“It’s been another great quarter for us,” Thomson said. “Overall, we’re really happy with the quality, with the performance of the portfolio.”
Guidance Raised Again After Strong Quarter
Diploma increased its full-year guidance, with Thomson describing the update as a further 7% upgrade. The company now expects organic growth of 14%, while acquisition growth guidance remains unchanged at 6%. Margin guidance was lifted to 26.5%.
Thomson said the revised outlook implies profit growth for the year of “a little over 40%.” He added that Diploma is “in very good shape,” with encouraging momentum and “loads of opportunity ahead.”
However, Thomson cautioned analysts not to assume that the current level of growth and upgrades would continue indefinitely. Responding to a question from Morgan Stanley analyst Annelies Vermeulen about implications for the next financial year and the company’s medium-term model, Thomson said he saw “absolutely no reason” to upgrade the financial model.
“This is not a normal year for us,” Thomson said. “We’re not going to be delivering 45% EPS growth, that kind of mid-20% return on capital every single year.” He said investors should expect the company to move back toward its financial model next year, which he said is broadly where market consensus currently stands.
Controls Remain Strong as Life Sciences Faces Tougher Markets
Thomson said sector trends were broadly consistent with the first half of the year. Controls continued to post “very strong, broad-based growth,” with IS-Group, Clarendon, Peerless and Windy City Wire all growing at double-digit rates.
He said these businesses were taking market share in attractive end markets. Excluding Peerless, organic growth for the group is now running at 10% for the year, Thomson said.
In Life Sciences, conditions remain more difficult. Thomson said markets are tougher and the division is working through “a little bit of product lifecycle refresh,” but he added that he was “really, really pleased” with the actions being taken by the team. Diploma expects low double-digit growth for the year in Life Sciences.
In Seals, Thomson said the company saw acceleration in the third quarter and expects a good fourth quarter as well. He described the international Seals business as “a bit better” but “patchy,” while North American Seals continues to perform well.
Peerless Growth Expected to Moderate From Elevated Levels
Peerless remained a major topic for analysts, with Thomson saying the business continues to perform “fantastically” and is still delivering above group averages and above its own track record.
At the same time, he said growth is moderating in the second half as expected, given tough comparisons from prior periods. Thomson said that moderation will continue into next year before the business returns to a track record of high single-digit to roughly 10% growth.
Asked by Deutsche Numis analyst David Brockton about demand trends and margin moderation at Peerless, Thomson said market demand and broader market conditions were unchanged. He pointed to a healthy backlog of new builds, a healthy refurbishment environment and continued supply chain constraints.
Thomson said Diploma is “deliberately just easing off the margin” in Peerless by taking some heat out of spot pricing to drive more volume. The company is also adding business development resources in the U.S. and Europe, broadening product capability and investing more in inventory.
“Margins will ease down a fraction,” Thomson said. “They’re probably going to remain structurally above what we bought it at, but a bit below where we’re at today.” He said investors should still expect good profit growth from the business.
Acquisition Activity Continues, With Defense a Growing Focus
Diploma completed the acquisition of CDM during the quarter, which Thomson described as a $170 million deal involving a business with more than $80 million in revenue. He called CDM “a great interconnect business” and said it provides an attractive platform in the U.S. with exposure to U.S. defense markets.
Thomson said Diploma completed five deals in the third quarter, all of which had been announced at the half-year stage in May. The company has added 15 businesses over the past 12 months, which Thomson said is a record number for Diploma. He added that while deals “won’t always be linear,” the pipeline remains strong and diversified, with balance sheet capacity available.
Bank of America analyst Virginia Montorsi asked about the company’s exposure to defense. Thomson said that including CDM on a pro forma basis, defense represents about 6% to 7% of group revenue.
Historically, Diploma’s defense activity has been concentrated in Europe and air defense, Thomson said, stemming from the company’s aerospace capabilities. The company is now expanding geographically and by market segment, including into the U.S. through CDM and into land defense through work in Eastern Europe and CDM’s expertise.
Thomson said the company has invested in facilities, resources and inventory in Eastern Europe to address defense demand in that region and the Nordics. He also noted the acquisition of Spring Solutions, a U.K.-based defense business, earlier in the year.
Windy City Wire and Data Centers Add Growth Opportunities
Windy City Wire also delivered a strong quarter, according to Thomson. In response to BNP Paribas analyst Daniel Cowan, he said Windy City Wire posted mid-teens growth and is performing well in data centers, petroleum, digital antenna systems and other areas.
Asked by Kepler Cheuvreux analyst Emanuele Sartori about the scale of data center exposure, Thomson said data centers represent about 15% of Windy City Wire and roughly 3% of the group.
He said there remains broad-based investment in data center development and “plenty of runway” for Diploma. The company is also broadening its exposure to more sustainable maintenance, repair and operations-related opportunities, including seals and gaskets for data center refurbishment markets in the U.S. and U.K.
Chief Financial Officer Wilson Ng said the company’s 26.5% margin guidance reflects strong top-line growth, operating leverage and the accretive contribution from Peerless. However, he said margins are likely near the top end and should moderate somewhat next year.
Ng cited continued investment in the business, including end markets, organizational development and the assurance platform, as well as Peerless margin management and the dilutive impact of acquisitions. “The overall message is the margins will continue to be strong, but it will moderate a bit next year,” Ng said.
About Diploma LON: DPLM
Diploma PLC, together with its subsidiaries, supplies specialized technical products and services in the United Kingdom, Continental Europe, North America, and internationally. It operates through three business sectors: Life Sciences, Seals, and Controls. The Life Sciences sector supplies technology-enabled products used in surgical procedures in operating theatres and endoscopy; testing equipment and services for clinical laboratories; and bio-pharma, food safety and testing, and other research-oriented products.
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