Overlooked DCC is poised to perform

The distribution company entered the FTSE 250 in June after dropping its Dublin listing to make the London exchange the sole home for its shares. While the dual listing has kept it off the radar of most UK investors, its track record suggests it warrants serious attention. In the 19 years since its float, the company has achieved compound annual operating profit growth of 13 per cent and earnings have grown in every year except one. Dividends have done even better. DCC has an unbroken record of dividend growth since its 1994 IPO, and a compound annual dividend growth rate of 15 per cent. Return on capital employed has been equally impressive, averaging 18 per cent over the past 10 years, well ahead of the company's cost of capital (estimated by analysts to be around 7 per cent), meaning DCC has been an excellent long-term value creator.

The business itself is somewhat sprawling with five divisions. But drill down and the core driver is DCC Energy, Europe's leading oil and LPG marketing and distribution player. DCC Energy reported a 78 per cent year-on-year jump in first-half operating profit to £33.5m, which represented nearly half the group total. This robust performance was driven by a cold snap in the first quarter, contributions from acquisitions and improved efficiency. That helped to drive the group's overall adjusted operating profit up 38 per cent on year to £69.4m while adjusted earnings per share leapt 39 per cent to 58.34p.

DCC reiterated its guidance for adjusted earnings per share to rise 13 per cent for the full year. That is already an impressive pace of growth, but analysts believe they could potentially do even better. The key drivers of possible positive earnings surprise are seen as integration benefits from previous acquisitions, a strong performance from the consumer electronics distribution business SerCom (which is the next biggest division after DCC Energy) and potential further M&A activity given the strong balance sheet.

SerCom had a confident first half with operating profit up 11 per cent year on year, all of which was organic growth, to £14.1m driven by its dominant position in the UK mobile computing market for products such as notebooks and tablets, and a growing presence in the mobile handset market. The third-largest division is DCC Healthcare, which markets and distributes pharmaceuticals and medical devices and provides contract manufacturing services to health and beauty brands. This division accounted for 12 per cent of full-year 2013 group profit and has a good track record of growth with a 9 per cent five-year compound annual growth rate.

Bringing up the rear are the final two, much smaller divisions - DCC Environmental and DCC Food & Beverage, which together made up 9 per cent of full-year 2013 group profits. While small, these two businesses still have attractive market positions. DCC Environmental is Ireland's biggest hazardous waste management company, while DCC Food & Beverage is Ireland's biggest independent wine distributor. Geographically, the UK accounts for the lion's share of group profits at 74 per cent, with continental Europe at 15 per cent and the Republic of Ireland at 11 per cent.

DCC's established market positions - nine number one positions in its 14 markets - have been excellent drivers of earnings growth. One caveat is that there is a certain amount of seasonality and weather impact on the DCC Energy business. This is because the winter months, which fall during the company's second half, are the busiest time for oil distribution with demand for heating oil heavily influenced by the weather. So the company's guidance for 13 per cent earnings growth this year depends on 'normal' weather in the second half. On the flip side, if we get a cold winter, there could be upside to profit expectations.