DCC: Acquisition To Further Strengthen The Business

Focusing on DCC Energy
We believe DCC, (DCC) Energy is a strong business, uniquely placed, given its extensive European footprint and leading market shares in both oil and liquefied petroleum gas (LPG), supported by the group’s robust balance sheet. The division has multiple levers that can help drive solid organic growth, which we expect to be complemented by strategic acquisitions that could provide significant upside to our numbers.

Scope for organic growth across geographies
We believe DCC Energy is well positioned to achieve further organic growth in oil and LPG, both in Britain and internationally. In Oil Britain, we believe the division can benefit from its increasing retail presence, improving market shares in underrepresented product segments and cross-selling additional products and services. In Oil Scandinavia, the group can penetrate new segments (such as the bunker site market), diversify its customer base and take advantage of its flexible logistics, while in Germany the group now has a strong local platform to address a large and fragmented market. In LPG Britain, DCC can leverage synergies from its MacGas acquisition and drive oil to LPG conversions, while internationally the group can improve the performance of previously underinvested assets acquired from oil majors, increase cross-border sales and expand into new segments.

Acquisitions to further strengthen the business
While the Energy division has significant organic growth potential, acquisitions remain a key element in driving earnings growth. On the oils side, markets remain highly fragmented, both in Britain and in Europe, enabling DCC Energy to further consolidate its markets and drive efficiency gains in a business where economies of scale are considerable. In addition, oil majors continue to divest non-core assets and we believe DCC remains well positioned to take advantage of this trend due to its strong balance sheet and reputation. Our numbers incorporate no contribution from further acquisitions, but we estimate that a £150m acquisition spend, coupled with a16% pre-tax ROI, would imply an additional £24m of PBT pa. While uncertainty about targets and timing remains, the Energy division’s historic share of acquisition expenditure at 59% would imply a more than £14m profit uplift pa from inorganic growth in the Energy division alone.

Valuation: Remains compelling
Despite a rise of over 11% in the last month, DCC still trades at an 8% discount to the support services sector on an FY14e P/E basis and at a 6% discount on an EV/EBITDA basis, even with no further acquisitions in our numbers. H1 results gave further reassurance about the strength of the underlying business and we remain buyers of the stock. We maintain our valuation of 3,217p, leaving 13% upside to the current share price.

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