DCC performance merits a better market rating

Financial reports covering the third quarter of 2003 have now been published by the majority of publicly quoted US corporations.

Unlike Europe and Britain, quarterly reporting of financial results is obligatory in the US. Third quarter reports had been eagerly awaited by investors in the hope that they would confirm that corporate profits were maintaining a strong rate of growth.

US firms did not disappoint and the majority of Standard & Poor's 500 companies delivered better-than-expected growth in sales and profits. Overall, the third-quarter reports confirmed that corporate profits in the US are growing at an annual rate of approximately 20 per cent.

In the Irish equity market, companies report profits on an interim and full-year basis. This twice-yearly reporting cycle is in line with British and European norms.

Companies whose financial year coincides with the calendar year generally report interim results over the summer months. However, there are a number of companies where the financial year does not coincide with the calendar year. One of these is DCC, which recently reported interim results for the half-year ended September 2003.

DCC began life as a venture capital company in the 1970s but transformed itself into a business support services group and listed on the stock market in the early 1990s. It is involved in sales, marketing and distribution activities across four business areas - energy, healthcare, food and information technology (IT).

DCC is listed on both the Dublin and London stock markets. In London, its shares are classified as part of the support services sector.

For most Irish companies, one of the benefits of this dual listing is that it provides pertinent comparisons with a peer group of similar companies. For example, the quoted Irish banks can be readily compared with their British counterparts in terms of operational ratios and valuation yardsticks.

Unfortunately for DCC the support services sector includes a highly diverse set of companies. These range from Compass, which is a foodservice organisation capitalised at £7 billion sterling (€10 billion), to Bunzyl, which is involved in outsourcing services and paper distribution and Regus, which provides fully serviced business centres. The Financial Times lists just under 100 companies in the sector.

This lack of an obvious peer group of directly comparable companies may be part of the reason DCC has a relatively low stock market rating.

The shares trade on a price-earnings multiple (PER) of approximately 10 times earnings despite delivering historically high rates of earnings growth. In the 1999-2002 period earnings per share (EPS) grew at an average annual rate of 20 per cent.

Since then growth has slowed considerably as a result of the generally weaker economic conditions in recent years. DCC's most recent results showed a rise in interim profits of just 2.3 per cent and seem to indicate that the slower pace of growth may persist for some time.

However, this may be too harsh a view to take of the company's prospects given that it achieved excellent results in its energy, healthcare and "other" activities.

This latter category includes the group's interest in Manor Park Homes that continues to capitalise on the boom in Irish house construction.

The key area of weakness was in the IT business which accounts for approximately one quarter of earnings. Profits declined by 27 per cent due to weakness in the British computer market. A process of restructuring at its distribution and software operations has reduced the cost base of these businesses. However, a resumption of growth in the IT division will be dependent on a significant pick-up in Britain.

In its report, the company stated that it expected "good underlying growth" in the second-half of the year (to end-March 2004) but noted that reported growth would be held back somewhat by sterling weakness.

The second half of the year is seasonally much more important, accounting for two-thirds of annual earnings mainly due to the energy sector which includes LPG and oil distribution.

Although the short-term growth prospects look somewhat pedestrian particularly compared with the historical trend, there are several very positive aspects to the most recent set of accounts. The interim dividend was raised by 15 per cent and this does send a positive signal regarding the management's assessment of long-term prospects.

Furthermore, the balance sheet is in a very healthy state with net cash of €32 million and this positive cash balance is growing at a steady pace. Such a strong balance sheet position means that DCC has the financial muscle to continue to grow via acquisition.

These are another set of solid results from DCC but upward momentum in the share price will probably be dependent on DCC's success in reverting to firing on all cylinders across its various business units.