JP Morgan lowers Diploma to 'neutral'

Analysts at JP Morgan Cazenove downgraded life sciences group Diploma from 'overweight' to 'neutral' on Tuesday, citing some "difficult" near-term trading and an "uncertain" medium-term outlook.

JP Morgan said the decision to cut its valuation on Diploma came after the stock outperformed the FTSE 250 by roughly 15% following its upgrade on 27 March.

"We still like the business, but difficult near-term trading, and an uncertain medium-term outlook in some businesses provide limited upside to the 25-30x medium-term price-to-earnings ratio," said the analysts.

The investment bank noted that Diploma's trading had deteriorated sharply in April, with underlying revenue down 28%, but acknowledged that the group's cost-saving actions produced around £3m-worth of offset, such that the drop-through on this revenue reduction was around 25%.

"Even on this revenue reduction, the group remains profitable and cash flow positive, with management suggesting this would also be the case on a 50% revenue reduction," said JPM, which also estimates that on an organic basis, April profit will be down about 40% year-on-year.

JPM, which did up its target price on the group from 1,760p to 1,850p, also stated Diploma's M&A ambitions were "not changed" but warned that travel and other Covid-19 related disruptions could cause "some delay".