DCC raises dividend amid resilience to Covid-19

Despite Covid-19 disruption, DCC (DCC) continued to march forward in its “seasonally less significant” first half. The sales, marketing and support services group increased its adjusted operating profit by 8 per cent year on year in the six months to 30 September, to £176m, as weakness in its liquefied petroleum gas (LPG) business was offset by momentum elsewhere.

LPG volumes sold dropped by almost a tenth to 726 kilotonnes (kT) amid lower demand from commercial and industrial customers. While cost-cutting boosted profit per tonne, the volume decline meant the division’s overall adjusted operating profit fell by 7 per cent to £46m.

Things were more positive in the ‘retail and oil’ business. While pandemic restrictions dampened the need for transport fuel, adjusted operating profit still climbed 9 per cent to £65m thanks to higher margin domestic and agricultural sales and good cost control.

The standout performer, however, was healthcare where the appetite for nutritional products and Covid-19-related medical supplies pushed adjusted operating profit up two-thirds to £40m. While half of this growth was organic, the business also benefited from acquisitions made last year such as health supplements manufacturer Ion Labs.

Excluding lease liabilities, net debt has more than doubled from the March year-end to £137m, reflecting almost £100m spent on M&A. Still, a lower working capital outflow saw free cash flow surge to £121m – up from £30m a year earlier – and the group has raised its half-year dividend.

DCC is a low-margin business with a gross margin of just 13 per cent, but its diverse operations have provided resilience during this crisis. While analyst consensus sees full-year adjusted operating profit dropping 5 per cent to £471m in 2021, it is projected to rebound to £512m in 2022. So, despite the uncertainty ahead, DCC offers attractive defensive qualities. Buy.

Last IC View: Hold, 7,008p, 17 Jul 2020