DCC PLC (LON: DCC) – Highly cash generative business model and strong balance sheet.

DCC PLC is a FTSE 100 quoted entity, which provides services related to sales, marketing, and support services. It operates through four divisions, namely Retail & Oil, LPG, Technology and Hardware. DCC employs around 13,500 people across four business divisions. The Company operates in 20 countries and supplies products and services which are used by millions of people every day. The Company has undertaken around 280 acquisition since flotation in 1994, reflecting an investment of nearly £3.3 billion in the past 26 years. It has an excellent track record of delivering 14.5% compound annual growth in operating profit over 26 years as a Public Company.

On 18 May 2021, DCC expects to announce its FY21 results for the year ending 31 March 2021.

 (Source: Presentation, Company Website)

(Source: Presentation, Company Website)

Divisional Introduction

(Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

DCC has invested around £410 million as average annual spend over mergers and acquisitions in the last three years, which holds significant accretive growth opportunities. The recent acquisition in the United States is also offering geographic diversification benefits. The Group has substantial growth opportunities available in each division and can expand its market position in both new and existing market. Overall, the Company continued to build its platform and capabilities to capitalise on market opportunities. Therefore, the Group is well-placed to generate substantial value for its shareholders in the long run.

However, the Covid-19 restrictions can impact the volume and overall demand in the short-term. Moreover, there is a risk associated with data security amid remote working conditions. Also, there are uncertainties related to extreme weather conditions. Similarly, change in market dynamics after Brexit, acquisition risk, and stringent regulatory policies can also impact the growth trajectory of the business.

Industry Outlook Dynamics

The global LPG market is forecasted to register a CAGR of 4.4% from 2019 to 2027, which shall be supported by increased adoption of LPG as an alternative to fossil fuels and favourable demographic factors. Similarly, the market size of the global Multi-Vendor Support Services sector is projected to grow from US$15,440 million in 2019 to US$16,600 million by 2025, reflecting a compounded annual growth rate of 1.8% in the forecast period of 2019 to 2025. The growth catalyst includes rising maintenance costs of OEM services, a growing need for support services, and rapidly changing in IT infrastructure.

(Source: Presentation, Company Website)

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of DCC PLC.

Recent Developments

26 January 2021: DCC has appointed Mr Mark Breuer, as non-executive Director, with effect from 1 February 2021.

5 January 2021: DCC completed the acquisition of United Propane Gas and expanded its presence in the US LPG market. The acquisition will expand the DCC presence in the US from 14 to 21 states and nearly double its customer base.

Interim Management Statement for the third quarter ended 31 December 2020 (as on 2 February 2021)

• DCC’s operating profit for Q3 FY21 was strongly ahead of the last year despite the uncertainty and disruption caused by the global pandemic.
• However, the business continued to experience reduced volume demand from industrial and commercial customers, due to restricted operations. Adjacently, cylinder and domestic demand remained strong.
• The Group also benefitted from the acquisitions of NES Group in the US and Budget Energy in Ireland.
• The Retail & Oil segment delivered robust organic operating profit growth; however, the Covid-19 restrictions impacted the volume in the third quarter. However, the operations in Britain and Scandinavia delivered strong performances with good procurement and cost control alongside growth in lubricants, non-fuel income, and roadside services.
• The Healthcare division delivered an excellent performance in Q3 FY21 as it experienced strong demand for nutritional products and benefitted from the acquisitions of Ion Labs and Amerilab Technologies in the US.

Financial and Operational Highlights for the six months ended 30 September 2020 (as on 10 November 2020)

(Source: Company Website)

• The Company performed strongly during H1 FY21 as the adjusted operating profit surged by 8.3% year-on-year to £176.1 million.
• The adjusted earnings per share rose 7.0% to 117.9 pence despite the ongoing Covid-19 disruptions, reflecting resilience of the business model.
• Subsequently, the interim dividend was zoomed up by 5.0% to 51.95 pence per share.
• Driven by robust working capital performance, free cash flow generation remained excellent, surged £90.3 million on the prior year.
• The Group also remained active from a development perspective and committed nearly £90 million in new acquisitions since May 2020.
• As of 30 September 2020, the balance sheet appeared liquid and robust with gross cash of approximately £1.5 billion and committed bank facilities of £400 million. It shall facilitate the continued development and growth of the DCC. The net debt was £137 million, excluding lease creditors.
• The outlook remained uncertain due to increased Covid-19 restrictions; however, the resilient business model underpins long-term growth prospects.

Share Price Performance Analysis

On 1 March 2021, at the time of writing (before the market close, at 11:12 AM GMT), DCC shares were trading at GBX 5,834.00, up by 1.11% against the previous day closing price. Stock 52-week High and Low were GBX 7,204.00 and GBX 3,463.00, respectively.

From the technical standpoint, 14-day RSI (48.46), 100-day SMA (5,559.96), and 100-day EMA (5,760.240) are supporting the upside potential.  

On a YTD basis, DCC’s stock price has remained resilient with a positive return of ~13.56%; it has significantly outperformed the FTSE All-Share Support Services and FTSE 100 index with a return of nearly -1.69% and +1.99%, respectively.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

DCC reflects a diverse, resilient, and agile business model which delivers excellent cash flow performance. It has conducted several acquisitions during the past year, which holds substantial growth prospects. DCC remained active from a development perspective. However, the short-term outlook remained uncertain due to Covid-19 challenges. Considering a normal weather conditions for the remainder of FY21, DCC expects to deliver another year of development and growth in operating profit, which shall fall ahead of current market consensus expectations. Therefore, the Company has a strong balance sheet to navigate this ongoing uncertainty and deliver growth in the longer term.

(Source: Presentation, Company Website)

Considering the strong operating profit, cash generation capabilities, diverse business model, accretive growth opportunities, and support from the valuation as done using the above method, we have given a “BUY” recommendation on DCC PLC at the current price of GBX 5,834.00 (as on 1 March 2021, before the market close at 11:12 AM GMT), with lower-double digit upside potential based on 20.31x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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