BEHIND THE CORPORATE VEIL:DCC, with a market capitalisation of €2 billion, is small compared with the near €20 billion capitalisation of the market's largest company, AIB. However, it is one of a small group of dynamic mid-capitalisation stocks in the €2 billion to €4 billion range that includes Kingspan, Grafton Group and IAWS, among others.
DCC is a difficult company to describe as its activities are spread across a range of businesses. Looking at how it is classified on the London market, where it is included in the support services sector, is of little help. This is essentially a catch-all sector for firms that do not fit into the mainstream.
DCC may be best viewed as a mini-conglomerate and, as such, has no close peers in Ireland. The only way to analyse it is to examine each of its operations.
Essentially, DCC markets and distributes its own and third-party branded products in energy, information technology, healthcare, and food and beverages. DCC also has a developing environmental services business and has a stake in Irish housebuilder Manor Park. This has been a very successful investment for DCC, but its 50 per cent stake in Manor Park is now up for sale.
DCC's policy is to build strong positions in sectors that offer long-term, above-average growth prospects with scope for bolt-on acquisitive development. Its activities are now evenly split between Ireland and Britain.
After a strong start to the year, the shares have drifted back and are now slightly down year-to-date. They are up by about 30 per cent over the past 12 months, which is a little better than the overall market.
Full-year results to the end of March showed operating profit of €143 million, which was in line with analyst forecasts.
Operating profit rose 8 per cent in the energy division to €60.5 million despite the relatively warm winter and volatility in product prices.
The IT distribution business, Sercom, where profit rose 35 per cent to €33.8 million, had a good year on the back of strong volume growth.
Healthcare delivered a steady 6 per cent increase in profit to €22.9 million, with most growth in the second half of the year.
One of DCC's more interesting divisions is its environmental division, where operating profit rose by 91 per cent to €10.5 million. This was mainly due to the purchase of 50 per cent of Scotland's William Tracey in May and 90 per cent of Wastecycle Group in November.
The food and beverage unit saw profit fall by 2 per cent to €15.1 million, due to weakness in the British wine market.
The contribution from associates was down significantly, with profit after tax down by 46 per cent to €11.8 million. Manor Park Homes is the principal business and timing issues accounted for much of the shortfall.
For shareholders, the bottom line was a 1.6 per cent increase in earnings per share (eps) to 160.1 cent, with a 15 per cent increase in the full-year dividend to 49.3 cent per share. This puts DCC on a price earnings ratio of 15 and a dividend yield of 2.2 per cent.
The shares are likely to tread water until the sale of the stake of Manor Park is complete. Press speculation has suggested a value of €600 million for Manor Park, which would value DCC's stake at about €290 million. However, negative sentiment towards the residential housing market could result in a lower than anticipated price. This could lead to some short-term price weakness, which Croesus would view as a buying opportunity.
The sale of Manor Park would free up cash resources to fund acquisitions. The environmental division in particular offers scope for long-term growth.
DCC has also moved to plan for the eventual succession to Jim Flavin, the group's founder. Chief operating officer Tommy Breen is to take on the role of managing director, while Flavin is to become executive chairman for three years.
With a proven management team and strong balance sheet, DCC is well positioned to achieve strong medium-term growth.
