RBC raises price target on Diploma

Analysts at RBC Capital Markets hiked their target price on technical products and services supplier Diploma on Thursday, citing its strong positions in niche markets, its continued high returns and its ability to augment underlying growth with bolt-on/in-fill deals.

RBC, which kept its 'sector perform' rating for Diploma unchanged, adjusted its forecasts for the group to reflect its acquisition of Virginia Sealing Products and some recent forex movements.

"We assume current spot rates continue going forward, which is a big positive given 80% of revenues are non-UK. Our EPS forecasts move up 1% for this year and 7% for next as a result," said RBC.

The Canadian broker noted Diploma was still facing some cyclical concerns but felt the fact that it was "a diverse business by end markets and geographies" and that products were primarily geared to customers' operating rather than capital budgets provided some "defensive qualities".

"At H119, management talked about some early signs of slowing in the industrial seals market and given this and Brexit uncertainty, we have some slowdown in organic growth factored into our forecasts - we forecast 4% in H219 and 3% in 2020 vs the 6% delivered in H1."

On the positive side, RBC said "a choppier economic outlook" had the potential to unlock more acquisition opportunities.

"We continue to like Diploma for its strong positions in relatively defensive, niche markets, its continued high returns and the ability to augment underlying growth with bolt-on/in-fill deals," said RBC.

"However, we see the valuation as up with events and already discounting further acquisition potential."

The increase in its target price from 1,280p to 1,400p reflected the EPS estimate increases, but the broker noted that if the group could spend £50.0m on mergers and acquisitions its valuation would increase by roughly 200p per share.