Interactive Investor

Share of the week: Record deal puts DCC on the map

22nd May 2015 16:30

Lee Wild from interactive investor

Very few investors have heard of DCC. It's a £4 billion support services company, involved in the distribution of oil, pharmaceuticals and technology. It also runs a recycling business. But typically strong full-year results, published on Tuesday, were accompanied by news of its largest acquisition ever, and the share price has rocketed by over 18% since.

Despite a 4% drop in revenue to £10.6 billion - lower oil prices dented income at the energy business - underlying pre-tax profit grew by 7% in the year ended 31 March to £200 million. Each division chipped in at the bottom line, but healthcare did especially well, growing operating profit by over 30% to £39.7 million.

However, it was the acquisition of French liquefied petroleum gas (LPG) distributor Butagaz from Shell for €464 million (£338 million), which really set the share price alight. The French LPG market is the second largest in Western Europe and Butagaz has a 25% share.

DCC reckons the deal will be significantly EPS accretive, with return on capital employed expected to be substantially above DCC's cost of capital. Last year, Butagaz made an underlying operating profit of €74.2 million. Earnings were already set to receive a boost following the acquisition of the Esso express petrol station network in France.

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It looks like DCC got a good deal, too. An enterprise value/operating profit ratio of 6.2 times is hardly expensive. The purchase is being part-funded by a placing of 4.2 million shares at 4,700p to raise £197 million.

"Given the company's impressive track record in terms of making earnings enhancing acquisitions, the fragmented nature of many of its markets and management’s optimism about potential deal flow, it is in our view appropriate to attribute an amount of acquisition value to our target price," says Gert Zonneveld at Panmure Gordon. "We increase our target price from 4,550p to 5,300p and retain our 'buy' recommendation."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.