Diploma Plc – Overstrained Price and Valuation

Diploma Plc (LON: DPLM) is an FTSE 250 listed holding Company, which supplies specific technical services and products worldwide. The Company is organised into three different business sectors: Seals, Controls, and Life Sciences.

The Company will announce Preliminary Results on 16 November 2020.

Investment Highlights – Watch at GBX 1,930.00

• Acquisitions remained core part of Diploma’s strategy, and with the outbreak of covid-19, it has become difficult to execute transactions.
• In the Month of July, the revenue is down by 4% on a reported basis and 10% on an underlying basis.
• As per valuation metrics, EV/EBITDA Price/Cash Flow and Price/Book Value multiples of the Diploma Plc are currently higher as compared to the corresponding multiples of the support services industry, reflecting overstretched valuations.

Update on Trading Performance (released on 27 August 2020)

• The Company showed strong trading performance, with improving revenue, strong profit and robust cash generation. The Company was trading in-line with expectations and remained confident about the growth prospects.
• DPLM adjusted working practices to ensure a safe environment and decentralised business model supports agile responses. The Company accessed Job Retention Scheme launched by the UK government and by the June end all furloughed employees had returned to work. Based on recent performance, the Company has repaid all support funds to the UK government.
• In Q3, the trading was significantly impacted by covid-19 with revenue down by 12% and 21% on reported and underlying basis, respectively. With the performance started to recover in June, the revenue slowly improved and stood down by 4% and 10% on a reported and underlying basis, respectively.
• For life Sciences Business, demand started to recover in Q3 end, reflecting ease in lockdown and hospitals re-opened for general activity. The Seals business performed strongly throughout the covid-19 crisis, especially in the International Seals business and the North American Aftermarket The Controls business was severely impacted by covid-19, and the majority of Controls businesses are recovering well, while Civil Aerospace remained challenging.
• The Company took actions to reduce costs and conserve cash. The Company has a strong balance sheet with approximately £100 million of liquidity.

One Year Share Price Chart

Daily Chart as of August 28, 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Key Risks

The Company’s performance is impacted by risks related to market trends, political change and change in the policies of regulatory authority. The Company’s operational performance is impacted by the loss of a key supplier. Any adverse changes in the major markets in which the Company operates will have a significant impact on financial performance.

Technical Performance

From the technical standpoint, 14-day RSI is currently in an overbought zone, which means the stock price could decline in the short term.

Valuation Methodology

Conclusion

The Company has shown resilient trading performance, and with business recovery in June, the revenues have started to improve gradually. Despite the uncertain outlook, the company demonstrated the strength of value-add distribution model, benefits of broad-based scalable businesses, diversity of end segments and the importance of a strong balance sheet.

The Company will continue to further develop strengths to grab maximum growth out of opportunities. The Company expects full-year performance to be resilient and in line with market expectations. The global political and economic climate has become more uncertain, which may give an early warning of slowing demand and have a potential impact on key markets. Moreover, the company’s share price is trading near its 52-week high, which raises doubt over its upside potential. The stock made a 52-week low and high of GBX 1,191.00 and GBX 2,152.00, respectively.

Based on the factors as highlighted above, we recommend investors to keep a “Watch” on Diploma Plc at the closing price of GBX 1,930.00 (as on 28 August 2020), with support from few catalysts needs to be evaluated at a later stage such as benefits from market recovery.

Investec PLC – Operating with a robust level of capital and liquidity

Investec PLC (LON: INVP) is an FTSE 250 listed specialist bank and asset manager. It serves a selective client base with various financial services and products.

Investment Rationale – Buy at GBX 147.35

• Low gearing position with robust levels of liquidity.
• Against the market backdrop, the Company was able to generate a return on equity (ROE) of 11.0% in FY20.
• The annual dividend of the INVP is 7.43, which has outperformed the annual dividend yield of 2.50% delivered by the benchmark index, FTSE Mid 250.
• Price/Book, EV/Sales and Price/Earnings multiples of INVP are quite undervalued as compared to the corresponding multiples of the Financials industry.

Recent Regulatory Update

16 July 2020: The Board on INVP confirmed the appointment of Stephen Koseff as a non-executive director.

Quarterly Capital Adequacy Update

(Source: Company Website)

The major highlights of the capital disclosure as of 30 June 2020 were:

• Investec help capital in excess of regulatory requirements.
• The leverage ratio for Investec Limited and Investec Bank Limited (IBL) were 6.8% and 7.2%, respectively.
• Common equity tier 1 ratio of Investec Limited and IBL were 11.3% and 12.6%, respectively.

Financial Highlights (for the year ended 31 March 2020)

(Source: Company Website)

The key highlights of the FY20 results released on 21 May 2020 were as follows:

• Due to Covid-19 disruption, the adjusted operating profit declined by 16.8% to £608.9 million (FY19: £731.9 million).
• Customer deposits increased 2.9% year-on-year, and Core loans and advances remained flat against FY19. Subsequently, the funds under management shown net inflows of £599 million.
• Led by 17.8% year-on-year depreciation of the Rand and impacted profitability, the net asset value per share was 414.3 pence (31 March 2019: 434.1 pence).

One Year Share Price Chart

1-Year Chart as of 28 August 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Risk Assessments

The outlook remains uncertain and fluid due to Covid-19 pandemic. The delayed economic recovery can significantly impact client activity. Moreover, the interest income is impacted by lower interest rates.

Valuation Methodology

Conclusion

The Company entered the crisis with a strong capital position and a robust balance sheet. Moreover, it has good levels of liquidity with low gearings. Amidst the prevailing economic backdrop, it has been focusing on improving efficiencies and controlling costs. Moreover, their client franchises shown resilience in FY20 with increased customer deposits and flat core loans against FY19. Overall, it is focused on building the business for growth in the long run.

High and Low were GBX 388.33 and GBX 122.55, respectively. From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price. Also, over the past five-years, total revenue and assets have consistently grown.

Based on the factors discussed above, we have given a “Buy” recommendation on Investec PLC at the closing market price of GBX 147.35 (as on 28 August 2020) with lower double-digit upside potential based 0.40x Price/Book (approx.) on FY20E Book Value Per Share (approx.). 

*All forecasted figures and Peer Information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

*The “Buy” recommendation is valid for the current price as covered in the report as on 1^st September 2020.

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