Weekly Market Commentary | 28/11/2023 | DPLM, SRC, CRH | Trust Your Process

This week, Jamie Ward talks about why missing out on some great investments might not be a bad thing, especially when thinking of the wider context where you may have invested in something better. He believes that having a process is far more important than whether you did or did not buy a security and rounds it off by explaining why his process means he currently rejects SigmaRoc as an investment.

Following the previous week’s, very positive performance in bond markets, driven by lower US inflation data, markets were altogether more sanguine last week. Overall, the UK market was largely flat with large caps modestly outperforming mid-caps. The US once again outperformed, but the dollar was weak so to a sterling investor the difference was negligible.

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Last week, one of the companies that released, was Diploma (see below). For 25 years, it has been one of the very best companies to invest in within the UK. This chart shows the total return since 1998; a near unbroken run of unrelenting positivity. Note; this is a log chart. Such is the consistency of returns to shareholders over time, a conventional chart would look like a hockey stick.

Diploma has a long history, having been listed since 1960. It has been involved in distribution for decades but prior to 1998, the sectors addressed were electrical components with smaller lines in building products and steel products. In the run-up to 1998, the shares had been a dog; having halved over the previous four years.

The reason was that the old areas the group were focused on, were becoming commoditised and thus Diploma was losing any economic advantage it had. A change of emphasis was required and that change occurred over about five years from 1996 to 2001 as the group was restructured. The driver behind this was Bruce Thompson, who had joined the company as director of the electronics division in 1994 and was elevated to CEO two years later in 1996. It was under his leadership that the company as it is known today was formed.

The disposal of the bulk of the old business, which was a 94% holding in SEI Macro, an electronics distributor occurred in 1999. I assume the timing of that sale was rather good since, for those of us with wrinkles who can remember, the dotcom boom provided a meaningful fillip to valuations that had a vaguely techy operation – and electronics was a techy-sounding business line. In the place of the sold businesses, a new business was born that focused on three areas, that being controls, seals, and life sciences.

The reason for these areas is that, rather simplistically, these are where the management of the time believed it could generate value. Disparate though they may be, they were/are areas with considerable opportunity for consolidation of smaller, unlisted companies. Many of which are in private hands and therefore a listed acquirer could benefit from public market arbitrage. There are also areas that sell critical consumables. This helps with the competitive advantage because:

  • The things sold are typically quite cheap relative to the costs of the wider customer base. Customers therefore, whilst not price-insensitive, do allow sellers a worthwhile return for the convenience of surety of supply.
  • They are consumable, which means that the products need buying over and over again, which provides Diploma a degree of stability that isn’t always present in more capital cycle exposed businesses.
  • It is fragmented thus allowing consolidation i.e., the opportunity set. This is also important because it turns Diploma into a one-stop shop for certain customers who historically may have had to source products from multiple vendors.

In the words of David Byrne, you may ask yourself, why am I telling you this?

Diploma first came onto my radar about eleven years ago. At the time it was towards the bottom end of the FTSE250 and thus, in my professional life, had reached a size that it should be under consideration. I did quite a lot of work on the business at the time and really liked what I saw. However, I didn’t buy it and indeed, haven’t bought it subsequently.

I couldn’t give the exact date in which the work was concluded but I’d guess sometime in late 2012 based on the fact I think it was around 500p per share. Given that the shares are now 3326p at the time of writing and, once you include the dividend, the total return since then is c. 775%, you might think I’m annoyed at myself…

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But I’m not, it is important to keep a sense of perspective, and assessing the conditions of the time can help here and thinking about whether your process was followed.

Consider markets at the time. Following the aftermath of the Great Financial Crisis in 2008, stocks had been super cheap – even some absolutely brilliant businesses were available for absurdly low valuations. This really began to change in 2011 when confidence was beginning to return. By 2012, quality companies in particular were really motoring and some great returns were enjoyed. However, as we went through to the end of that year, valuations were looking stretched compared to the history of markets up until that point.

For Diploma, in particular, the shares had just come off a tremendous run lasting fifteen years and despite the clear value-creation, it was looking expensive. The chart below is an indication of the valuation as given by EV/EBIT and the arrow is the point in time when I first had a good look at the business. Note that whilst the shares have become a lot more expensively rated since at the time, the rating was close to all-time high levels.

At this point, I did what a lot of people do, I set it aside on the ‘watchlist’ vowing to pounce should the valuation become more compelling.

Ten years later and it never did become more compelling. In truth, I might have suspected that Diploma was a special business in 2013 but I didn’t know. Ex ante, you never really know what the future will bring and we account for that with the value-discipline part of our process. I’m a value-investor at heart and paying up ex ante is a difficult thing to do.

I follow a lot of investors on Twitter (X is a stupid name and people know what I’m talking about when I say Twitter). I frequently see posts where the poster laments either selling or not buying this or that super investment. These people really ought not to beat themselves up too much; we’re never going to get every superb investment and it is important that you have a process and accept that sometimes that causes you to omit great investments.

Finally, remember that investing is partly about opportunity cost. Just because I didn’t invest in Diploma, it doesn’t mean I didn’t do well. A purchase I made, and kept at the time of the analysis has returned over 600%. And, unlike Diploma, this one is still as cheap today as the time I bought it.

So, don’t dwell on opportunities missed and trust your process.

This week, in addition to Diploma, I looked at Sigmaroc’s massive proposed reverse acquisition of CRH’s supposedly non-core European operations.

Diploma, Full year results to end of September

The full-year figures from Diploma prompted a c. 10% rise on the day and resulted in the shares approaching the all-time highs we saw a couple of years ago, which occurred just before a spike in inflation knocked the valuations of growth companies.

Full-year results

The figures for the year were undoubtedly strong with organic revenue rising 8% and total growth, including that from acquisitions, being 19%. Nevertheless, this was in line with consensus with the ‘beat’ coming from a greater than forecasted rise in the operating margin, which rose 80bps to 19.7%. This was achieved despite leverage in the business declining from 1.4x to 0.9x. However, the main reason for this decline in leverage was that the company raised >£230m in new equity capital during the year. Additionally, the returns on capital employed (which Diploma refers to as ROATCE) rose further to 18.1%.

Acquisitions are a hugely important part of the growth of Diploma as is true with other buy-and-build type enterprises. Last year it made twelve and spent £280m in the process. The aforementioned equity raise meant that this was done whilst the balance sheet was strengthened. Of the twelve acquisitions, ten were described as bolt-on and accounted for a combined £33m of the spend. On average these were purchased at a valuation of less than 5x EBIT – given that Diploma is trading at over >20x EV/EBIT, you can readily see why this is considered value accretive. Historically these sorts of purchases would have been the bread and butter of the business but given the small average size, they are now unlikely to materially affect a business such as Diploma for which the market capitalisation is >£4b.

The other two acquisitions were described as strategic in nature, which I guess justifies them in paying closer to 10x EBIT i.e., double that of the bolt-ons. One was a European supplier to fluid power solutions; the acquisition was for £170m with a further £19m possible should it hit 2024 and 2025 targets. The other was for an American-based distributor of aftermarket parts and repair services into the US industrial automation end market.


Growth comes from two places in Diploma, organic and acquisitions. In both cases, management is very bullish with 5% organic revenue growth (though you would assume a portion of this is inflation) and 6% in acquisitions so far – more growth will come from more acquisitions. Further out, the management is confident that the business is in the right place – this seems fair, and it has a long track record of addressing growing markets. On the acquisitions front, the pipeline of potential purchases is said to be c. £1b.


I have mixed feelings about ROATCE as a measure of profitability. A few years ago, there was a shift from earnings-based metrics across multiple industries as a measure of progress and more focus on versions of return on capital. The logic was sound in that analysts and investors used returns on capital as a measure of the quality of an enterprise i.e., the higher and more sustained the number, the more evidence of a competitive advantage that can drive further profitable growth. In recent years, however, there has been a trend towards management incentive schemes being targeted towards these measures. For me, this represents an issue as targets can create perverse incentives (Goodhart’s Law) – especially when your remuneration package has the potential to be as big as that of the incumbent CEO.

Diploma has historically executed exceptionally well, however, with its valuation being so high, it is in a privileged position that even potentially unwise acquisitions can appear value accretive. Consider, a company making £100m of EBIT per year that is trading at 25x EV/EBIT and thus has an EV of £2.5b. If it was to make an acquisition of £25m EBIT and pay 12x EBIT, it would pay £300m. However, were the share to mechanistically value the newly acquired earnings at the same multiple as the existing business, it would add £325m of value since the acquired earnings would re-rate to 25x in line with the acquiree. 25x £25m = £625m, the value accreted. £625m minus the cost of the new earnings (£300m) equals £325m.

This isn’t to say that Diploma has become sloppy, but for much of its history up until c. 2011, the shares of the group regularly traded at EV/EBIT multiples of 10x or less. There is a risk that we assume that the strategic acquisitions mentioned above are value accretive by virtue of them being integrated into the Group. Were Diploma’s valuation to slip back to historic levels for whatever reason, then these 10x EBIT acquisitions may seem a lot more average.

The final point worth mentioning is that in the last three years, Diploma has spent 3x more on acquisitions than all of the previous 25 years combined. It may be that this is fine, but the business built its track record on small bolt-on purchases and it feels like that has changed since Johnny Thomson took over in 2020.


It doesn’t matter which metric I use; Diploma looks expensive here. The reality is that there is only 5% of organic revenue growth coming through and at least some of this will be in the form of price increases, which means that the volume growth will be less than 5%. Yes, there has been a great history of acquisitions but to justify these levels, it needs to execute flawlessly for years to come.

Last week, I talked about DCC, which has a similar model in some ways. It seems to be on a valuation of around half that of Diploma for fundamentally similar outlooks and prospects.

SigmaRoc/CRH, Acquisition/Divestment

Last week, it was announced that SigmaRoc was to acquire the European lime operations of CRH for c. $1.1bn. This is subject to approval by the shareholders of SigmaRoc, with an EGM due to convene on December 11th.

History (of SigmaRoc)

SigmaRoc was founded in 2016 as a vehicle for the acquisition and improvement of quarries, lime, and associated industries. There is a history prior to 2016, however, this should be ignored as the equity that existed prior to 2016 was unrelated to what it is now – SigmaRoc prior to 2016 was little more than a listed shell. Since 2016, it has acquired 20 businesses largely around the North Sea. Firstly, in the Channel Islands, then in mainland UK, Benelux, Scandinavia, and Central Europe. This latest, and by far the largest acquisition, should it go through, will further change the footprint to Germany whilst increasing the presence in Central Europe via large operations in Poland and the Czech Republic.

The sale from CRH’s perspective

CRH’s announcement was short, it states that the company has chosen to divest of these businesses because the valuation was attractive and the capital freed can be used for further profitable growth. It is also stated that the division generated sales of $610m and $137m of EBITDA in 2022. This implies a valuation of 1.8x sales and 8x EBITDA.

CRH is a canny operator that has consistently delivered decent returns for shareholders. It has done so through understanding the value and opportunity of the global aggregates and building materials market. It does not refer to the operations as non-core but rather states that the price offered was good.

The purchase from SigmaRoc’s perspective

The proposed acquisition is separated out into three parts. The main part, referred to by SigmaRoc as Deal 1 is by far the largest and key to the proposal. It involves German, Czech, and Irish operations for a £645m. Deal 2 and 3 are for the UK and Polish operations respectively and are options at present. Should the options be exercised, the total additional spend would be £220m. SigmaRoc stated that the CRH holdings are deemed non-core, which usually means that they take up too much capital and human resource to justify their contribution to the group. I can’t see where CRH refers to them as non-core though. This would constitute a reverse acquisition (one where the acquiree is larger than the acquirer). Consequently, the SigmaRoc of the last few years will be less relevant to the future success of the group than what is being acquired.


Frustratingly three different currencies are used when talking about this proposed acquisition so I apologise for flitting between currencies. There will be approximately £200m in equity raised – reading between the lines it looks like the fees for this and the other aspects will be c. £6.7m, which is quite a lot on a £300m market cap business. There will be another c. £450m raised in new debt, which represents about two-thirds of a new debt facility. There will be also a deferred consideration of c. £150m financed through further debt.

Following the deal, the market cap will be c. 60% higher whilst the debt load will increase three-fold implying three times EBITDA. A little high but one assumes there are intended cost-saving measures that will improve the ratios.


Reverse acquisitions make me nervous. Obvious though it may be, it is worth stating that a group, following a reverse acquisition, bears little resemblance to the group beforehand since more than half of the enlarged group is made of operations that didn’t used to be a part of the group.

Reverse acquisitions can work out very well; a good example of this is Croda. In 2006 it bought Uniqema, the oleochemicals business of ICI, and the subsequent returns to shareholders have been very good. Even despite the 60% fall in the share price since 2021, the shares with dividends reinvested have delivered over 1000% since the acquisition. It should be noted, however, that ICI was unfocused and frankly poorly managed with Uniqema languishing. In the case of CRH, this very much isn’t the case, the company has proved itself shrewdly managed for a long time so the required presupposition of value-accretive improvements is harder to make.

To come full circle, it is entirely possible that SigmaRoc will be very successful in the coming years, but so much of the investment process is an art, and I struggle to gain comfort in the shares. As always, there is opportunity costs and as I stated last week, the reasons for investing are as important as the ultimate outcome. For me, I own a theoretically similar business in Breedon, where I think I trust the strategy a bit more, and the canniness of the investments it has made are clearer. You can of course argue that SigmaRoc is cheap here with the shares trading close to the tangible net asset value but for value investors, the market is a target-rich environment and so SigmaRoc doesn’t look that special from this point of view either.


Disclaimer: Jamie owns shares in Breedon Aggregates.


Jamie Ward

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This article is for educational purposes only. It is not a recommendation to buy or sell shares or other investments. Do your own research before buying or selling any investment or seek professional financial advice.