RBC Capital Markets upgrades Diploma to 'sector perform'

Analysts at RBC Capital Markets downgraded upgraded industrial supplies company Diploma from 'underperform' to 'sector perform' on Tuesday, stating the stock's valuation was now "less stretched".

RBC Capital said it had opted to upgrade the stock after a roughly 30% fall in Diploma's share price so far this year and an approximately 10 point fall in its price-to-earnings ratio over the last 12 months.

Whilst the Canadian bank said this was "still on the expensive side of the sector", Diploma's valuation has come down, and it now sees it as justified given the relatively defensive, high return nature of the underlying business and the strong potential for further mergers and acquisition on top.

"We have increased 22/23E by 1.5%/3% for H1 results, positive FX tailwinds, and recent M&A, although our target price reduces to 2,450.0p from 2,600.0p to reflect a 50bp increase on our discount rate," said the analysts.

"Whilst clearly not economically immune and admittedly with tough comps for the next few quarters, DPLM does operate in relatively defensive end markets, which are generally part of customers' opex budgets, and the balance sheet remains strong (year-end forecast gearing 1.4x), which provides ammunition for further M&A."

Reporting by Iain Gilbert at Sharecast.com