DCC’s latest pitch to the ESG crowd fails to electrify – for now

DCC, the Irish distribution and services group that sells everything from vitamin-packed gummies to audiovisual equipment for events companies, has always been a bit of a head-scratcher for international investors.

It may have worked hard at simplifying its story since quitting the Dublin stock market nine years ago for the bright lights of London. It sold its food and beverage assets, including the Robert Roberts tea and coffee and Kelkin health foods brands, as well as a frozen and chilled foods logistics business, in 2014, and its environmental unit, covering recycling and waste management, three years later.

But it’s still no elevator pitch, with its divisions spanning healthcare, technology, liquefied petroleum gas (LPG) and retail and oil.

Still, chief executive Donal Murphy – only the third person to lead the group since it was set up 46 years ago by Jim Flavin as a venture capital company – knows just the slide to flash at the City to focus attention when reporting financial results: the group's track record.

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The latest update, published this week, shows that, as of its financial year to the end of March, DCC’s operating profits have grown by a compound annual growth rate of over 14 per cent since it floated in 1994. Dividends kept close to the same pace over the period, while the company has managed to convert an average of 100 per cent of its operating earnings into cash – fuelling its ability to invest and acquire – over the period.

They're not a bunch of charts on a slide that are going to do anything to shake off DCC's boring image. But has another Irish company consistently delivered on the financials like this one over the long term? It helps explain why the group broke into the FTSE 100 in late 2015 and is one of only four Irish-grown businesses currently included in the prestigious UK shares index (along with CRH, Flutter Entertainment and Smurfit Kappa).

Energy focus

Still, Murphy knows all too well that the fast-growing pool of ESG-focused (environmental, social and governance) stock market investors have become increasingly uneasy about the fact that almost 70 per cent of the group’s profits are coming from energy.

This includes oil sold for household heating and fuel pumped through its petrol station networks across Scandinavia, France, Britain and Ireland. And it also comprises an (albeit, lower emissions) LPG business serving industry and homes, which traces its roots back to DCC’s 1977 purchase of Flogas in Ireland and which has grown rapidly in the past seven years through acquisitions in France, Asia and the US.

On Tuesday, DCC told investors that it had decided to merge the LPG and retail and oil business into a new division, called DCC Energy, and it committed to reducing the unit’s so-called “scope three” carbon emissions to net zero by 2050, or sooner.

When it comes to emissions targets, it’s important to look at what companies are actually committing to. Scope one emissions are released as a direct result of a company’s activities. Scope two includes the nasty stuff that’s pumped into the atmosphere as a result of the generation of energy used by a company. Scope three is the tricky one. This covers all emissions that a business is indirectly responsible for, from suppliers to the consumption of its products and their end-of-life treatment.

DCC is not starting from scratch. An easy – interim – win has come from moving oil-guzzling industrial groups, like CRH’s Tarmac unit in the UK, to lower-emission LPG, a transition fuel on that company’s own decarbonisation path. The group is also supplying biomethane, a carbon-neutral renewable gas made from food and farm waste, and renewable electricity through power purchase agreements with wind and solar farm operators to some commercial customers.

The near-term transition among DCC’s domestic customers, who mainly live in homes off the gas grid, will be slower. The company reckons that only more affluent families will have switched by the end of the decade to biofuels and the low-cost heat pump systems that DCC is rolling out, with take-up accelerating in the next decade.

Greener future

While there may be fears that DCC’s profit from customers will deteriorate as they head down a greener path, the company sought to convince investors this week that the opposite is the case. It reckons it would make £1,800-£2,500 (€2,122-€2,947) profit from a typical oil or LPG domestic customer over the space of seven years. By moving that customer on to a heat pump, installation alone would increase profits by up to 40 per cent on that household. The company reckons it can double long-term value from a customer if it were to bundle the likes of solar power, heat pumps, battery solutions and service contracts.

Meanwhile, Norway, where DCC has 168 serviced Esso stations and 62 unmanned petrol stations, is the petri-dish for testing what forecourts will look like in future. Norway is the leading European market for electric vehicles (EV), with EV penetration across the country running at 16 per cent and up to 30 per cent in some locations where DCC has stations.

DCC’s fast-charging units in that market are delivering 20 per cent returns on investment from the get go – and gross margins that are a quarter higher than traditional fuels. It’s also bringing charging units to public parking locations and homes, and is opening a new front in Oslo where it is developing a multi-storey commercial and residential building with floors of parking space with charging plugs.

This is a second big attempt by DCC to tackle the ESG overhang on a stock that has fallen by more than a fifth over the past five years, even as its operating profit soared 70 per cent over the period. A previous investor presentation in November 2020 on how the company would help its customers through an energy transition underwhelmed – mainly because of a lack financial detail.

This time round, Murphy and the team have packed in forecasts. They include predictions that it will double its operating profits by the end of the decade – and move from a company that currently generates two-thirds of its profits from energy to one where up to 75 per cent of earnings will come from healthcare, technology and clean energy and renewable activities.

The latest iteration hasn’t electrified the market so far. DCC’s shares slumped as much as 12 per cent between early trading on Tuesday and Thursday – underperforming weakening global equity markets in general, before joining in a broad rally on Friday.

The jury is clearly out on whether the figures on Murphy’s favourite slide hold up as DCC navigates the green transition.