DCC, the Irish fuel distribution-to-technology services group, should consider selling assets to unlock value for shareholders if it wants to avoid attracting bid interest from private equity firms or an activist investor building up a stake in the business, according to a big Canadian investment bank.
DCC’s operating profits have expanded by a compound annual growth rate of more than 14 per cent since it floated in 1994, while dividends have kept close to the same pace over the period.
However, RBC Capital markets said in a note to clients this week that DCC’s London-listed shares had consistently underperformed the wider support services sector.
“Operationally, management continues to execute very well, given everything that has been thrown at it. However, whilst we have sympathy with ‘the share price will look after itself’ mantra, this has not been the case, with the shares underperforming the sector by 55 per cent over the last five years,” RBC analyst Andrew Brooke said.
“We believe management now needs to be more proactive about demonstrating value. We believe buy-backs make sense at the current level, and also think potentially asset disposals could demonstrate value. If management does not act, we would not rule out private equity or activist action.”
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DCC shares have fallen almost 27 per cent over the past 12 months, while the FTSE 100, the index on which it is listed, has risen almost 4 per cent. The FTSE 350 Supports Services index has declined by about 15 per cent over the same period.
Mr Brooke said he believed DCC’s shares had underperformed due to consumer exposure and the conglomerate nature of the company, with divisions spanning healthcare, technology, liquefied petroleum gas (LPG) and fuel retail and oil.
Investors have also been concerned about uncertainty over the energy transition and DCC’s “lack of focus on shareholder returns”, he said. DCC makes up about two-thirds of its profits from energy.
However, the company, led by chief executive Donal Murphy, said last May that it expected to double its operating profits and reduce the proportion of business coming from the sale of fossil fuels by the end of the decade, as it sets off on a journey to cut carbon emissions from its energy business to net zero by 2050.
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The company has since bundled the LPG and retail and oil divisions into a new division, called DCC Energy, and set a target for the unit’s so-called scope three carbon emissions to get to net zero by 2050. This covers all emissions that a company is both directly and indirectly responsible for, including in the supply and consumption of its products.
RBC said that the energy division was “the key” to DCC’s valuation.
“Whilst DCC has made sizeable acquisitions in health and technology of late, energy remains circa 66 per cent of profits and is the business with the best scale and platform with still significant consolidation opportunities, especially in LPG,” Mr Brooke said. “Though we appreciate that clarity on long-term returns is unlikely to be forthcoming any time soon, given the energy transition will take time, we think management is doing a good job so far regarding transitioning the business and its customers, and current [return on capital employed] in the division remains high.”
A spokeswoman for DCC declined to comment on the RBC report.
