Diploma Plc’s chairman Christopher Thomas described the group’s prospects in its three areas of activity as favourable in one, moderately good for another and quite the reverse for the third. The first is its steel business, the third, building components and in the middle comes electronics. Overall, group pre-tax profits rose 10% to ú27.4m and turnover was up 13% to ú216.1m. Electronics is the biggest division by far for the London-based holding company, and it contributed turnover up 10% to ú139m, but with margins falling, operating profits were down 5% to ú13.6m. It could soon become bigger still as Thomas said the group had some interesting potential acquisitions under review and negotiations and added that we are particularly keen to build on our electronics activities both in the UK and overseas. Of the three divisions, the eroding margins problem was most apparent in electronics, but the company has made significant investment to ensure future profitability, according to Thomas. The compnents part of the electronics division has three main businesses, Macro, Flashpoint and Nortronic. Macro is a franchised distributor of semiconductors and related components in the UK, Eire and Eastern Europe. Thomas predicted that the semiconductor distribution market will become less cyclical as it continues to grow, but on the downside, margins will be squeezed as competition increases, such is the nature of competition. However Thomas’s previous efforts at predicting the future of the semiconductor industry have gone somewhat pear-shaped: it is just two years since he predicted that demand would fall away.
Discounts and rebates
Thomas also complained of the use by larger distributors of discounts and rebates to win business, but added that Macro had done well to retain its position in all its markets. Flashpoint is the quick-reponse part of Macro, aimed at personal computer manufacturers, another business with tight margins, which had its knock-on effect on Flashpoint. Similar increased competition factors affected Nortronic, which distributes components to the passive and electro-mechanical sector, which traditionally has higher margins than Macro’s target markets. Diploma spent ú2.0m during the year on Macro, Flashpoint and Nortronic, mainly investing in technology to streamline the business. A further ú1.9m was spent moving Macro’s stores from Slough in Berkshire to Crewe, close by Nortronic’s base. South Hills Datacomm is a value-added distributor of data and telecommunications equipment in the US and South America, and has windows of opportunity for siginificant growth in both markets, according to Thomas. Once the telephone rings, Thomas said the company can easily convert enquiries into sales: it’s getting the thing to ring that appears to have been the problem. To this end, the company is investing in CD-ROM catalogues, better mail targeting and advertising on the Internet. Rayfast supplies cable and interconnect products to the defence, autosport, aerospace and commercial electronics markets, and was acquired 15 months ago. It has exceeded the management’s expectations, according to Thomas. Finally, Anachem, which distributes instrumentation, equipment and consumables to the healthcare market, had similar experiences as customers tightened their belts. The electronics businesses are operating in growing markets, but Thomas said the investments should give them a stronger platform from which to operate. In his fireside-chat manner, Thomas ruminated on the company’s current state, and concluded that it is perhaps a springboard position with cash balances and strong cash flow. The question remains as to which way it jumps from the springboard, given the state of the UK building industry in particular. The market liked what it saw, and the shares put on 12 pence to 453 pence. The company will pay a final dividend of ten pence, which makes up a 14.5 pence total for the year, a penny better than last time.