DCC successfully navigates wholesale LPG markets

Given the spread of DCC’s (DCC) commercial activities you would imagine that the knock-on effects of the pandemic could have weighed on business volumes. In the event, the sales, marketing and support services group trumped market expectations, recording double-digit operating profit growth across three-out-of-four of its divisions, with the outlier being the liquified petroleum gas (LPG) business, which delivered a 6.7 per cent increase at constant currencies.

That’s respectable enough when you consider the volatility in wholesale LPG markets. Volumes at its largest revenue contributor benefited from strengthening demand from commercial and industrial channels, although profitability was held in check by the lower-margin UPG and Naturgy acquisitions. Through the year, the group forked out around £600mn on acquisitions, the lion’s share of which was linked to the deal to purchase Almo Corp – DCC's largest acquisition to date.

The most impressive performance was attributable to the DCC Healthcare. Operating profit growth came in at 25.5 per cent at constant currencies even though the DCC Vital business, which is engaged in the marketing of medical products to healthcare providers, had to contend with reduced volumes of routine hospital procedures even as restrictions eased.

Free cash flow of £383mn was well adrift of last year’s comparator due to working capital timing benefits in FY 2021. Nevertheless, management felt able to fund the group’s 28th consecutive year of dividend growth.

A forward rating of 14 times consensus earnings is hardly prohibitive, especially given a forward yield pushing 3 per cent. Ordinarily, logic would dictate that DCC’s business strands should continue to witness increased volumes, but the potentially negative impact of rising interest rates on aggregate demand leaves us circumspect. Hold.

Last IC View: Hold, 6,254p, 9 Nov 2021