On Tuesday, Citi updated its outlook on Diploma Plc (DPLM:LN), increasing the price target to £49.00 from the previous £47.00 while maintaining a Neutral rating on the stock.
The firm's analyst highlighted that Diploma is anticipated to deliver another positive surprise following its guidance upgrade in May 2024, with expected second-half organic growth at approximately 8.0%.
This figure surpasses the VisibleAlpha consensus estimate of 7.3%, spurred by a stronger-than-expected performance in its Peerless segment, which has benefited from a demand rebound in the aerospace sector.
The analyst noted that despite the optimistic growth outlook, Diploma's share price may have already factored in its long-term growth potential. The stock is currently trading at a 65% premium to the sector's enterprise value to earnings before interest, taxes, and amortization (EV/EBITA) compared to the average premium of 29% over the last decade. This valuation perspective has been a key factor in Citi's assessment.
In response to the company's performance, Citi has adjusted its earnings per share (EPS) forecasts for Diploma for the fiscal years 2024 and 2025. The forecasted EPS has been increased by approximately 3% to 149p and 169p, respectively. According to the analyst, these revised projections place Citi's EPS estimates about 3% above the consensus.
The decision to raise the price target to £49 is a direct result of the revised earnings forecast. The analyst reaffirmed the Neutral rating, indicating that while they acknowledge the company's positive growth trajectory, the current market valuation adequately reflects Diploma's future earnings potential.
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