Diploma PLC

Diploma PLC (DPLM) is a holding company, which supplies specific technical services and products worldwide. The company is organized into three different business sectors: Seals, Controls, and Life Sciences. The company provides services and products for several industry sectors, such as industrial original equipment manufacturers, aftermarket, and fluid controls. The company operates in several sectors through a1-group, IS-Group, Hercules Fluid Power Group, Filcon Electronic GmbH, and Diploma Healthcare Group. The company also supplies clinical diagnostics consumables and instrumentation to the Life Sciences and Pathology sectors. Currently, the group is a member of the FTSE 250 index.

On 18^th November 2019, the company will announce the preliminary results.

Trading Statement (as on 28^th August 2019)
The company’s reported revenues are projected to grow by 13 per cent, including underlying revenue growth of 5 per cent and contribution from acquisitions, net of disposals stood at 6 per cent.Revenues are also likely to benefit from a currency tailwind of 2 per cent. Operating margin is projected to be increased marginally from the last year data. The company's balance sheet remains robust and the business model is highly cash generative. In this financial year 2019, the company has spent £65 million on acquisitions.

Financial Highlights (H1 FY2019, £million)

(Source: Interim Reports, Company Website)

In H1 FY2019, the company’s underlying revenue increased by 6 per centas compared with the corresponding period of the last year, through acquisition contribution of 4 per cent and currency movements adding 1 per cent. Adjusted operating margin surged by 20bps to 17.5 per cent as compared to 17.3 per cent in H1 FY18. Adjusted profit before tax increased by 13 per cent to £45.5 millionagainst the £40.4 million in H1 FY18. Adjusted earnings per share stood at 30.5 pence, a surge of 14 per cent from the prior year same period data. Basic earnings per share accelerated by 15 per cent to 26.4 pence versus 23 pence in H1 FY18. Interim dividend per share was 8.5 pence, an increase of 10 per cent against the 7.7 pence recorded in H1 FY18. Free cash flow decreased by 21 per cent to £14 millionas compared to £17.7 million in the first half of 2018.

Share Price Performance

Daily Chart as at August-28-19, after the market closed (Source: Thomson Reuters)

On 28th August 2019, Diploma PLC shares closed at GBX 1,576 and rose by 1.55 per cent from the previous day closing price. Stock's 52 weeks High is GBX 1,654 and 52 weeks Low is GBX 1,137.94. The company’s stock beta was 0.79, reflecting the lower movement of the stock as compared to the benchmark index.

Conclusion
The company had shown decent financial performance in the first half of 2019. The company has a decent segmental performance from all the business units. The group had posted decent underlying operating income and expected FY2019 results to be more profitable.

The company is on track to deliver decent underlying progress with modest margin progressionand positive contributions from acquisitions.

In the second half of 2019, the group currently faces some of the risks which can impact the business performance like: downturn/instability in major markets, supplier concentration/loss of key suppliers and customer concentration/loss of key customers; cybersecurity/information technology/business interruption, loss of key personnel and product liability; foreign currency, transactional and translation; and inventory obsolescence. The company is also trading near its 52-week high, indicating limited upside potential.

On the basis of above rationale, we recommend investors to keep a “Watch” on the stock at the closing price of GBX 1,576 (as on 28th August 2019), while we look for any upcoming catalysts.
 

James Fisher and Sons PLC

James Fisher and Sons PLC (FSJ) is a Cumbria, United Kingdom-headquartered provider of specialised engineering services and innovative solutions to the marine, oil and gas and other global, high assurance industries. Clients of the group include large multinational customers and governments, offering the company a broad and diversified global client base. The company provides a diverse selection of services within key markets through several industry-recognised companies under its name. The operations of the group are differentiated in four core operating segments, namely Tankships, Offshore Oil, Specialist Technical and Marine Support.

Recent Development
The company on 7 August 2019 announced that it had acquired the holding company of Serviços Marítimos Continental S.A., Continental Participação E Administração Ltda, for a total cash consideration of £7.5m, helping the group to increase its presence in the important and growing market for subsea services.


Key Financial Highlights (H1 FY 2019, in £m)
 
(Source: Company Filings)

Due to the two businesses acquired during the first half and strong growth in Offshore Oil and Tankships, revenue grew by 10% over the prior period to £286.9m (H12018: £260.5m). Revenue was 4% ahead of the prior period at constant currency and excluding acquisitions. Statutory operating profit increased to £24.5m (2018: £24.3m) and underlying operating profit remained unchanged at £24.5m (H12018: £24.5m), as a strong performance from Offshore Oil and Tankships divisions was offset by a slower start by Marine Support due to deferral of projects. Statutory profit before tax declined by 3% to £20.9m, against £21.5m reported last year, while underlying profit before tax decreased by 4% to £20.9m from £21.7m reported last year. Statutory diluted earnings per share were 33.6 pence (H12018: 34.5p), while underlying diluted earnings per share were 33.2 pence per share (H1 2018: 34.5p). The decline in earnings per share reflected a slightly higher effective tax rate and lower underlying profit before taxation.

Valuation Methodology
Method:  EV/SalesApproach (NTM)


Share Price Commentary

Daily Chart as at 29-August-19, before the market closed (Source: Thomson Reuters)
 
On 29 August 2019, at the time of writing (before the market closed, GMT 8:53 am), FSJ shares were trading at GBX 1,996, down by 0.44 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 2,280.00/GBX 1,568.00. The company's stock beta was 0.52, reflecting less volatility as compared to the benchmark index. Total outstanding market capitalisation was around £1.02 billion, with a dividend yield of 1.49%.

Conclusion
Reflecting a weak market in South Africa and slow start to the year, Marine Support performed below expectations, although several projects were deferred into the second half. Although the company enters into forward currency contracts, it is still exposed to risk from foreign exchange, which has magnified as the threat of Brexit increases. Demand for the products and services offered by the group may be adversely affected by changes in government regulation or policy, energy prices or individual markets. The risk of governance and compliance issues has also increased as the company increases its presence in key growth economies and overseas emerging markets. In a downturn in the world economy, demand for solutions and services by the marine and oil and gas industry can be adversely affected, the risk of which has increased significantly in recent times.

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the closing price of GBX 2,005.00 (as on 28 August 2019), while we look for any upcoming catalysts in the near term.

*All forecasted figures and peer information have been taken from Thomson Reuters.
*Peers:Eurokai GmbH & Co KGaA, Touax Sa Sgtr Cite Sgt Cmte Taf Slm Toua SCA, Ocean Wilsons Holdings Ltd, BBA Aviation PLC

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