Tuesday 19 March 2019

DCC future looks bright as it writes latest chapter of success story


The recent snow storms and cold weather is likely to have boosted demand for DCC’s heating oil
The recent snow storms and cold weather is likely to have boosted demand for DCC’s heating oil

David Holohan

DCC is a fantastic Irish business success story. It is a company which has grown from humble beginnings in the mid-1970s to become a leader across Europe in each of the group's different business segments. Along the away, it has also generated significant value for shareholders.

The core business units focus on the distribution of liquified petroleum gas (LPG), transport fuels and heating oils.

These make up three-quarters of group profitability. DCC also has attractive healthcare and technology units which provide sales, marketing and services to large technology companies and healthcare providers, respectively.

By its own admission, DCC does not seek to be an overly exciting company. Instead it seeks to be one which delivers consistent profit growth for shareholders and let the results speak for themselves.

Management focuses on building businesses brick by brick, generating as much organic growth each year as it can and then augmenting performance through value-accretive bolt-on acquisitions.

Companies which have clear strategic objectives tend to be very well run and that is certainly the case with DCC. Its management team has a laser focus on cash generation and achieving returns on capital significantly ahead of the group's cost of capital.

These values are engrained across the group and allow management to direct capital towards internal projects and external acquisitions which meet its demanding return-on-capital targets. (Return on capital is the operating profit generated by an asset divided by the price paid for that asset). Repetition of this process generates significant growth.

In recent years, there has been a significant step-up in acquisitions by DCC as the company spent £1bn (€1.13bn) to expand its presence in France. It has also entered the Asian and North American markets, both of which present meaningful growth options for future transactions.

The successful execution of this strategy has provided consistent growth in profitability and dividends for shareholders and has led to a significant compounding effect over time.

DCC's operating profit has increased at a compound annual growth rate of 14pc over the past 23 years and the compound annual dividend growth has been 15pc over the same period.

Going forward, DCC is well placed to be able to continue to grow through identifying attractive acquisition targets in new geographies. Management too will be able to implement the same measures which have made the European business so successful.

The recent cold weather across Ireland and Britain is likely to provide an additional fillip for DCC's next set of earnings, due to be reported in May, as the record snowfall will have led to a significant increase in demand for heating oil, boosting heating oil volumes for the company.

With a market capitalisation of £6bn, DCC remains in the sweet spot of being able to double in value every six to seven years.

The future looks very bright for DCC and there is no reason the successes of the past can't be replicated in the years ahead.

If management remains steadfast in its focus on maintaining strong cash-flow generation and high returns on capital, shareholders should continue to be very happy owners of one of the highest-quality companies in the world.


David Holohan is chief investment officer at Merrion Capital

Any investment commentary in this column is from the author directly and should not be seen as a recommendation from The Sunday Independent

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