DCC Plc – Stock Valuation Analysis by Bargain Value

Today, we will check the another company from our portfolio. It will be DCC from the “Support service”  sector (sub-sector – Industrial Suppliers) and it is included in FTSE 250. They are mainly involved with sales, marketing and distribution of wide range of products, such as: oil, LPG, fuel cards, transport fuels, computing products, communications products, unified communications, consumer technology products.

Purchase price (11.12.2015): 5750.00 GBp

As always, let’s start with looking at the stability of enterprise’s revenues:

DCC Plc

The chart presents, what we would like to see. The long-term, growing tendency. The average pace has been £ 896 ml. of annual growth. Since 2004, revenues have grown up by over 650%. It is great and stable performance and the last period can be described as very dynamic, with a faster growth rate, similar to the periods of 2007-2008 and 2010-2011. With such stable revenues, we can predict them with very high probability.

Unfortunately, when we look at operating profits it’s not so pretty as revenues:

DCC Plc

A lot more irregularity here. We can notice, that this indicator is someway correlated with the periods, when the revenues have been on the similar level as semester before or even have fallen a little bit. We are talking about 2009 and 2011 to 2014. It is possible, that in the time when the economic situation is worse, the company’s operating costs rise significantly.

The same dependence can be seen on the net profits chart:

DCC Plc

It is a reflection of the previous chart. The current situation is great, because higher revenues have an impact on the profits, which are higher too. It is sensible to expect, that the next semester will bring even higher revenues. Due to this fact, we should see net profit rising even more.

It is clear, that DCC generates good return with some irregularity in the category of net profits, but what about the profitability. Let’s look on the chart below:

DCC Plc

We can see similar falls in the profitability indicators connected with the lower net profits in the 2009 and 2011-2014. However, there has been a rise in 2012 caused by the lower level of assets and equity, not with better performance. The big, positive change in the second semester of 2014 is connected with a lot better results and we should be happy about this. The another fall in the last period is caused by the changes in the capital structure of the company (higher level of assets and equity). If there will be no other changes, we don’t see a reason, why ROA shouldn’t come back to the level above 5%, ROE should stay above 15%, closer to the 16% and ROCE should apear in the channel of 10% and 11%. When it happen, all indicators will be at the same or higher level, than the market and sector consensus. Today, the DCC stands out only in the category of ROE (market and sector around 13.50%).

The enterprise’s Cash Flows are very interesting:

DCC Plc

We can point out three facts here:

  • Operating flow has skyrocketed in 2008 and stay high since than. The last period has brung even bigger rise of them (+ £ 200 ml. in on year since 2014),
  • The company is still a developing enterprise and its negative investing flow is high,
  • The management is financing the grow from the core business, not from the liabilities, but despite this fact, the positive financial flow is very high in the last period,

DCC looks like it is preparing for some big investment. In the last two semesters, it has risen the level of current and non current liabilities, despite the fact, that cash level is enormous:

DCC Plc

In a year it has risen about £ 550 ml.. The only sensible reason for this is preparing for some big investment. However, despite this fact, the cash flow is healthy and the company generates real money on its activities.

We have talked about rising liabilities. Let’s check the debt level then:

DCC Plc

The total debt at the level of 75% is not very good for us. The capital gearing is very high. When the hard times will come, the company can have some trouble with paying back to lenders.

However, the current ratio is healthy right now:

DCC Plc

The level of this indicator is 1.39 nowadays. It has fallen in the last period, because the changes in non-current liabilites (+£ 484 ml.) has been bigger, than in current assets (+ £ 320 ml.). Although, we still can feel pretty safe about the DCC’s solvency.

We know quite a lot about this stock. Let’s determine, if it is cheap or expensive.

DCC Plc

P/E indicator tells us, that DCC is quite expensive (P/E for the sector is 22,48). Even if the net profits will rise to the level of £160 ml and the price will fall to the 5200.00 GBp for a share, the company will be still expensive (ROE  around 28.00).

The same fact is visible for the P/BV:

DCC Plc

However, here the situation is a little bit better, because the average for the sector is 3.68 (DCC 4.15). In this situation, we can only hope, that such high value will be justified in the future by a very big jump of the revenues and the net profits, which will be possible connected with current and future DCC’s investments.

In the end, let’s take a look, how much payment we can obtain from this company:

DCC Plc

High and rising dividend per share. In the last period is a little bit lower, but the long-term tendency is good. The lower yield is caused by a very high stock price. In 2015 it has risen from 3517 GBp to 5615 GBp, almost 60% in the year. If we had bought it earlier, today we would say, that we have a “Pearl” in our hand.

Let’s check this on the price chart:

DCC Plc

The higher pace of the growth in the last period is clearly visible. If the price maintains the growing trend, it can be a very good moment to buy shares, after the last correction.

Summary:

DCC as a company is great. It has good revenues and cash flows, it pays generous dividend and it is still developing. The only drawback is the current stock price. However, this company is superb and the higher price can be justified, if the company will maintain the development pace from the last year.

Current price (05.01.2016):  5550.00 GBp (-3,48%)

Price chart has been drawn from the LSE site