- Recovery in demand boosts operational gearing
- Diversification is a strength for the moment
DCC (DCC) must be the strongest UK contender for the Lord Hanson prize for most eccentrically diversified conglomerate. The group can lay claim to one of the oddest business mixes on the UK market. For example, it supplies LPG products and oil and petrol in the UK, beauty products in Germany, while selling bits of cable to the French. However, the strength of DCC’s diversification, as confirmed by the half-year results, poses the interesting question whether diversified conglomerates are back in vogue for the first time since the early 1990s.
There were definite signs that operational gearing kicked in during the half as heightened demand from commercial, industrial and transportation companies drove sales of LPG products and oil. Notably, more than half the group’s reported 15.5 per cent growth in operating profit to £195.8m was due to organic sales – which was impressive for a time that is seasonally quieter on the trading front. Another key ratio for DCC is the level of working capital in a business where stocking is an inevitable part of maintaining its service levels. In these results, the working capital requirement increased by £183m, which was a marked improvement on last year because of the lower use of supply chain finance.
With a forward PE ratio consensus for 2022 of 17.5, DCC has reversed the traditional discount that conglomerates tend to attract from investors, and the shares have performed well since our trading buy tip last year. However, with the rating now at a premium to the long-term price-to-earnings growth (PEG) average of 1.8, DCC’s resilience is now more than reflected in the price. Hold.
Last IC view: Buy, 5,732p, 10 Nov 2020
|ORD PRICE:||6,254p||MARKET VALUE:||£6.17bn|
|TOUCH:||6,254-6,260p||12-MONTH HIGH:||6,684p||LOW: 5,178p|
|DIVIDEND YIELD:||2.6%||PE RATIO:||21|
|NET ASSET VALUE:||2,768p*||NET DEBT:|
|Half-year to 30 Sep||Revenue (£bn)||Pre-tax profit (£m)||Earnings per share (p)||Dividend per share (p)|
|*includes intangible assets of £2.3bn, or 2,377p a share|