Well, hopefully someone is watching this board, last discussion post in July 2014. Does anyone know why this share seems to have fallen of a small cliff in recent weeks? Haven't seen anything obvious. Thanks, Dewman
"Irish distribution company LSE:DCC:DCC will bring the corporate week to a close.Analysts' expectations: Peel Hunt's Christopher Bamberry expects DCC's first-quarter update to be consistent with its full-year results released in May, which showed ..."
DCCs UK migration is now complete, with GBP reporting & a London-only listing (though its retained an Irish HQ & tax-residency), reflecting the fact only 10% (or so) of profits are now Irish-generated. It also removes a large component of the FX noise shareholders have experienced over the years. Otherwise, DCC remains the same a finely honed, but relatively conservative, acquisition machine. [In this instance, that's a compliment!]
Ive never found DCC particularly cheap, but it never really gets the respect it deserves either (i.e. to be wildly over-valued in my eyes!). The conglomerate tags still the bogey-man here rather unfairly, as DCC boasts many of the advantages the original conglomerates enjoyed. But aside from more recent wobbles (which now appear over), DCCs excellent performance has allowed management to ignore the (muted) calls for a break-up. Ironically, this excellence may now be catching up with them Energy (oil & LPG distribution) & Environmental (which is, arguably, complementary) are now delivering almost two thirds of DCCs profits. Were fast reaching an end-point now where selling or spinning off the other divisions, and investing in an accelerated Energy roll-up strategy across Europe, will make far more compelling operational & financial sense. Selling Food & Beverage would be an obvious first step this (struggling) pipsqueak now contributes just 3% of profits!
Over the past 19 years, operating profits enjoyed a 13.0% CAGR (versus a 14.7% CAGR for the dividend), while FY adjusted/diluted EPS is forecast to be up 13% yoy (I suspect well see a little better). Mashing them together, Im going to step it up a notch with a 15.0 Price/Earnings multiple. DCCs adjusted operating profit margin is 1.9%, but operating free cash flow (cash generated from operations, less net capex/PPE) margins significantly better at 2.2% a pattern thats been repeated in the past few years. This justifies a 0.20 Price/Sales multiple.
[NB: Noting market valuations (and M&A multiples) over the years, my rule of thumb is a 10-12.5% operating margin deserves a 1.0 P/S, on average. And higher margins justify an expanding multiple - for example, a 30% margin might deserve a 4.0-4.5 P/S multiple. Some people may find it hard to get their head 'round using this metric, so let's look at it from a different perspective: Assume Company X has 100 in revenue, and an 11 operating margin. This deserves a 1.0 P/S, so X's valuation is 100. Now, let's approach it another way - if we take the 11 operating margin, deduct 1 for net interest & 3 for a 30% tax rate, we end up with a 7 net profit. Applying an average long-term market P/E of 14, X's valuation is 98 - (basically) equal to the P/S approach.
However, a P/S methodology's more defensive than relying solely on a P/E valuation - which can be incredibly sensitive to small changes in assumptions (or actuals), as investors tend to inevitably & painfully discover... It's also much closer to how corporate/private equity acquirers actually think about valuation - believe me, they don't sit around worrying about P/E multiples (well, except when they're pitching an IPO!). Some readers would obviously advocate a full-blown EV/EBITDA approach, but I think that presents its own set of problems - plus many investors are uncomfortable or unfamiliar with the methodology anyway].
Finally, I note net interest of 23.4 million, just 11.4% of adjusted operating profit. Im comfortable with interest coverage of 6.7 times, or greater i.e. 15%, or less, of (adjusted) EBIT. So DCC can leverage up with an additional 149 M of debt (assuming a 5% interest rate), without any kind of significant financial or valuation impact. [The math: (206.0 M Adj OP * 15% - 23.4 M Net Interest) / 5%]. This debt would have minimal cost & would immediately enhance earnings via acquisitions (or share buybacks
Hi Wex, liked the analysis. Out of curiosity, where do you get the info on they're margins? Reason being I thought the oil and gas part of the business was high margin, particularly there LPG.
Something else to think about is the recent acquisition (Dec) of Kent Pharmaceuticals. Has increased size of the healthcare division by about a third overnight and will bring extremely high margins to that side of the business over the coming years.
2013 â The Great Irish Share Valuation Project (Part IV)
Prior Post: Here (valuation, no commentary)
Price: EUR 27.04
DCCâs another Irish company that isnât actually so Irish anymore. In fact, as they recently pointed out, over 75% of their profits & shares are earned/held outside Ireland now, prompting them to consider seeking admission to the FTSE UK Index Series (& cancellation of their Irish listing). Judging by previous/similar announcements by other Irish companies, this probably signals a fait accompliâ¦
Hand in hand with this migration out of Ireland, over the years, its Energy division has become increasingly important. The desire (it seems) of all the European energy majors to divest themselves of low margin oil & LPG distribution businesses has presented a unique opportunity for DCC to bulk up. Energy now makes up about 75% of revenues, but low margins (somewhere between 1 & 2%) means it only contributes about half of DCCâs operating profits. It also introduces significant year-on-year earnings volatility, depending on weather conditions.
Overall, this evolution will probably force a break-up/restructuring of the group eventually, something thatâs been periodically hoped & called for by investors. While the spread of more stable/higher-margin businesses has doubtless contributed to DCCâs operating performance, now investors generally view this conglomerate structure as an undesirable legacy of DCCâs origins. A pure play on energy distribution, perhaps coupled with its environmental division, is obviously DCCâs core business now â a spin-out/sale of the other divisions would accelerate its ongoing energy roll-up strategy.
Meanwhile, (up to) 20% EPS growth this year demands a bump-up in DCCâs P/E ratio. On the other hand, earnings will remain volatile & recent GBP weakness presents a substantial headwind for 2013 (eliminated, of course, if DCC abandons the EUR & the ISEQ ;-) ). Iâll increase their P/E to 14, but the continued Energy-led decline in their operating margin (to a likely 1.8%) now deserves a 0.175 Price/Sales ratio (plus a small/positive debt adjustment to reflect further acquisition capacity). DCC now also looks fairly valued.
I think it has been almost 5 years since the last post!
The SP has seen ups and downs since then but anyone who bought in the last couple of years has done well enough.
I thought they would suffer after Jim Flavin's departure but they still seem to be good at their takeovers, not overpaying but still picking up new businesses every so often and growing the EPS over time.
Gem are in for a bumper year so i have a very good feeling for these. They have don e particularly well in gaming and pc peripherals. More and more vendors are moving to Gem as their main distributor and they have one of the best reputations in the industry. This all bodes well for Dcc.
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