Acquisitions fuel DCC’s profits

For all of the diversification efforts that distributor DCC (DCC) has made over the past few years, energy continues to be the fuel that powers the business. 

The 25 per cent increase in DCC’s top line in the year to March was attributed, in the main, to higher fuel prices, which boosted the energy division’s revenue by 31 per cent, to £16.1bn. It also provided 70 per cent of the group’s adjusted operating profit.

But it remains a low-margin business, and without acquisitions last year would have been flat. The 11.3 per cent increase in adjusted operating profit to £656mn was driven almost entirely by M&A (+7.6 per cent) and forex gains (+3.5 per cent).  

These clearly come at a cost. It spent £360mn on 19 acquisitions last year, bringing the two-year total to more than £1bn. Over that time, DCC’s balance sheet has moved from a net cash position (excluding leases) of £165mn to net debt of over £767mn, although chief financial officer Kevin Lucey pointed out that leverage remains low at 0.9 times the group’s £800mn cash profit. 

The higher level of investment has affected the group’s return on capital employed, though, which fell from 16.5 per cent to 15.1 per cent.

The lack of organic growth also helps to explain the lacklustre performance of DCC’s shares. Even with a 17 per cent year-to-date gain, the shares are down by a quarter over the past 12 months. They may look like a relative bargain at 10 times earnings, compared with a 10-year average of 17 times, but on current form there seems to be little momentum to buy them. Hold.

Last IC View: Hold, 4,692p, 8 Nov 22