DCC PLC (LON: DCC) – Sustainable business model with a robust balance sheet position

DCC PLC is an FTSE 100 listed company engaged in providing services related to international sales, marketing, and support services. Moreover, the Company has segregated the operations into four broader divisions, DCC Retail & Oil, DCC LPG, DCC Technology and DCC Healthcare. DCC employs around 13,500 people across four business divisions. Furthermore, the Company operates in 20 countries and supplies products and services that are used by millions of people every day.

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

  

(Source: Company presentation)

Recent Trend of Dividend Payments

(Source: Company presentation)

Based on the strong trading performance during H1 FY21 and resilient business model, the Company had paid an interim dividend of 51.95 pence per share on 09 December 2020, while the ex-dividend date was 19 November 2020.

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. Furthermore, DCC Health & Beauty Solutions had delivered robust growth in nutritional products driven by the prior year acquisitions in the US, which have performed ahead of expectations.

Moreover, DCC LPG had managed to increase its footprints in the US business as it now has operations across 14 states in the US, while it was just ten states two years ago when it had entered the US LPG market.

 

(Source: Company presentation)

The Company had incurred the total cash expenditure on acquisitions of around £98.5 million during H1 FY21.

However, the performance can be significantly impacted by several risk factors. The demand for goods and services of DCC may get impacted by the current economic downturn. Moreover, the poor acquisition selection may lead to operational and financial difficulties. DCC has operations in around 16 countries. Thus, failure to comply with statutory obligations could result in regulatory action. The Group trades with a broader supplier base, and the loss of key supplier could have a significant operational impact on the business.  

After understanding growth prospects and risk assessments, we will analyse some key fundamental and shareholders statistics of DCC PLC.

A Glimpse of Business Segments (Profit Split)

(Source: Company presentation)

Recent Developments

On 01 April 2021: The Company updated that a non-executive Director, Mr Tufan Erginbilgic has been appointed as a non-executive director of Türkiye Petrol Rafinerileri A.Ş. ("Tüpraş") effective 31 March 2021.

On 23 March 2021: DCC announced that Ms Caroline Dowling (non-executive Director of DCC PLC) had been appointed as a non-executive director of CRH PLC effective 22 March 2021.

On 15 March 2021: DCC updated that DCC Healthcare would acquire Wörner Medizinprodukte Holding GmbH ("Wörner"), which is a leading provider of medical and laboratory products in Germany and Switzerland.

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

(Source: Company result)

• DCC had achieved robust profitability during H1 FY21 as the adjusted operating profit went up by 8.3% year-on-year to £176.1 million.
• The adjusted earnings per share grew by 7.0% to 117.9 pence reflecting the sound business model of DCC.
• The Company had managed to generate excellent free cash flow in the amount of £120.7 million during H1 FY21, driven by efficient working capital management.
• With regards to the financial position, DCC had an excellent balance sheet illustrated by net debt of £137 million as of 30 September 2020.
• On the liquidity front, the Company had gross cash of around £1.5 billion and undrawn banking facilities of £400 million as of 30 September 2020.
• Meanwhile, the adjusted operating profit of three business segments, i.e. DCC Retail & Oil, DCC Technology and DCC Healthcare, had shown growth during H1 FY21 as compared to an equivalent period of the prior year.

Financial Ratios (H1 FY21)

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 12 April 2021, at 09:57 AM GMT, DCC shares were trading at GBX 6,232.00, down by 0.99% against the previous day closing price. Stock 52-week High and Low were GBX 7,204.00 and GBX 4,943.00, respectively.

From the technical standpoint, 50-day SMA (GBX 6,035.00) and 50-day EMA (GBX 6,079.00) are supporting the upside potential. DCC's prices are trading in an ascending channel formation for the past four months and forming series of higher highs and higher lows. Currently, the prices are trading around the lower band of the pattern that is acting as an important support for the stock. An upside move from here may reverse the trend of the stock to the upward.

In the last three months, DCC’s stock price has delivered a positive return of ~11.99%; and it has outperformed the FTSE All-Share Support Services and FTSE 100 index with a return of around 7.96% and 3.51%, respectively.

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

Business Outlook Scenario

DCC had achieved robust financial performance during H1 FY21, with strong growth witnessed in operating profit during the period. The strong performance shown during the first half of FY21 had demonstrated the resilience and agility of the business model. Moreover, DCC has completed several key acquisitions during the past year, which holds significant growth prospects. DCC has strengthened its presence in the United States post completing the acquisition of United Propane Gas. The Company would acquire Wörner Medizinprodukte Holding GmbH to extend its reach in continental Europe. However, DCC had highlighted the short-term outlook as uncertain due to the Covid-19 challenges. Nonetheless, DCC has a strong balance sheet to navigate this ongoing uncertainty and deliver growth in the longer term. Overall, the Company would continue to build its platform and capabilities to capitalise on market opportunities.

Considering the strength of the business model, strong growth in DCC Healthcare during H1 FY21, decent financial performance, strong operating profit, consistent dividend payments, cash generation capabilities, and support from the valuation as done using the above method, we have given a “BUY” recommendation on DCC at the current price of GBX 6,232.00 (as on 12 April 2021 at 09:57 AM GMT), with lower-double digit upside potential based on 19.66x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

 

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

*The dividend yield is subject to change as per the stock price movement.

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