Cantillon

Inside the world of business

Sub-zero temperatures fuel DCC profit growth

DCC DEMONSTRATED yesterday that it’s an ill wind that blows nobody any good.

The harsh winter, which hit retailers at what should have been their busiest and most lucrative time of year, helped boost the industrial holding group’s fortunes to the point where it now believes that operating profit growth will be 50 per cent bigger than it expected three months ago.

Within around three weeks of the release of DCC interims early last November, a month-long spell of sub-zero temperatures in Britain and Ireland drove up demand in the group’s biggest division, fuel distribution, which includes Britain’s biggest home heating oil business.

While volumes increased in this business, its second biggest unit, Sercom, was benefiting from the fact that it was distributing Microsoft’s Kinect gaming platform, one of the best sellers last Christmas in its market.

It’s worth bearing in mind that DCC’s performance in its third quarter was exceptional. There will be very cold winters in the future, and there will be more successfully launched new products to distribute, but the odds on the two combining with the same impact in the future must be pretty big.

Investors seem to have copped on to this fact already.

Early in January, the stock received a boost when it became clear that Kinect had done well over Christmas, while it was already obvious that anyone in a business such as home heating oil had been enjoying a good patch.

But it’s likely that there is more good news to come. Comtrade, the French company it bought last year, has already begun to make a contribution, and the evidence of this will be seen in the full-year results next May.

At the same time, it looks like it is going to continue to grow through acquisition, it made a number of “bolt-on” purchases, which cost a total of €5.2 million, during the third quarter. It has a war chest of up to €500 million if it wants to do something bigger.

A glimmer of hope despite S&P downgrade

STANDARD & POOR’S may have joined its peers in downgrading Irish sovereign debt yesterday but there was a glimmer of hope in its report.

Despite concerns that any recovery will be further away, more uncertain and, when it does happen, weaker than previously expected, the agency suggests the economy is nearing its cyclical low point. It notes that the State’s current account deficit is “adjusting rapidly” and looks set to reach a surplus by the end of this year. And, despite little sign of a material correction in nominal wages, it states that unit labour costs are down on the back of cuts in other elements of remuneration and job losses, which between them have improved productivity.

That was possibly reflected in S&P’s decision to lower the rating on Irish debt just one notch – to A- for long-term debt and to A-2 for short-term borrowings. In the context of the three- and five-notch downgrades imposed in December by Fitch and Moodys respectively, and following the Central Bank’s downward revision of growth prospects earlier this week, that is as good an outcome as could have been expected.

On the day the Central Statistics Office reported the largest one-month decline since records began in the number of people signing on to the Live Register and the exchequer said the recent trend showing growth on tax receipts had continued into 2011, it holds out the prospect of recovery, however limited. Ireland remains on negative watch but SP analysts Frank Gill and Maritz Kramer expect that the State will ultimately retain its investment grade ratings on government debt.

But, lest we lose the run of ourselves, they do note “significant downside risks” to Ireland’s anticipated growth due in large part to reliance on demand for our exports and to the ongoing weakness in spending by consumers chastened by the collapse of property prices.

And then there are the banks – whose weakness was the trigger for yesterday’s downgrade – where already mounting levels of problem loans could be exacerbated by further job losses. The new government will have plenty yet to do.

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