- Diploma acquires US-based specialty fasteners business
- Expected to be 8% accretive to earnings in first year
- Structural growth market with high margins
Value-added specialist distribution business Diploma (DPLM) topped the FTSE gainers on Wednesday, gaining 12% to a record high after investors welcomed the proposed acquisition of Peerless Aerospace Fastener for $300 million (circa £236 million).
Over the last year the shares are up around 40% compared with a 5% gain for the blue-chip FTSE 100, making them the best performer in the index over that period.
WHY ARE INVESTORS SO EXCITED?
In simple terms, Diploma is proposing to purchase a high-quality business at an attractive price which is expected to be immediately accretive to the group’s margins and organic growth.
In the first year of ownership Peerless is expected to be accretive to group EPS (earnings per share) by around 8% and achieve a ROATCE (return on average tangible common equity) of 15%, more than covering the group’s cost of capital.
CEO Johnny Thomson commented: ‘Peerless is an excellent acquisition for Diploma, aligned to our strategy of building high quality, scalable businesses for sustainable organic growth.
‘We know and like the aerospace fasteners market and Peerless significantly extends our US capabilities and adds scale in Europe.
‘The business is already generating strong performance and there are significant opportunities to enhance returns by working together across our existing businesses.’
Based in Farmingdale, New York, Peerless is a market-leading distributer of specialty fasteners into the US and European aerospace markets.
Peerless’ strong customer proposition has driven a long track record of 9% organic growth a year achieving a circa 30% operating margin. For comparison Diploma has an operating margin close to 20%.
STRUCTURAL GROWTH OPPORTUNITY
Diploma highlighted there is currently a 10-year backlog for commercial aircraft supporting sustainable long-term market growth.
Aerospace fasteners are roughly a $7 billion market, highly specialised and ‘among the most critical components in aircraft manufacturing’ the company said.
An aircraft contains around one million fasteners representing up to 5% of an aircraft’s build value.
Diploma will make an initial payment of approximately £228 million in cash with the remaining 3.5% to be paid to management based on Peerless’ fiscal 2027 performance.
Year-end leverage (net debt to earnings before interest, tax , depreciation, and amortisation) is expected to be circa 1.3 times assuming no further acquisitions.
WHAT THE EXPERTS ARE SAYING
Shore Capital’s Akhil Patel said he expects to add 3% top 4% to fiscal 2024 EPS reflecting five months contribution and increased finance costs.
‘Given the strong growth profile we would expect to add c.10% to our outer years,’ added Patel.
Analyst David Brockton at Numis commented: ‘We believe the acquisition further demonstrates that Diploma’s value-added distribution proposition is peerless in the UK-listed market.
Brockton has upgraded his 2025 EPS forecast by 8%.
