Irish FTSE giant DCC fails to get credit for green shift as other parts of group drag

DCC, the Irish distribution and services conglomerate that sells everything from catheters to hospitals to audiovisual equipment to events companies, has never been a simple stock to explain in its three decades as a listed company.

But chief executive Donal Murphy’s favourite statistic this week as he courted analysts and journalists, after unveiling full-year results, was easy to grasp.

“If you invested £100,000 (€126,000) 30 years ago in DCC when we floated, you’d have £6.4 million in your back pocket today,” he told The Irish Times, clarifying that this includes share price gains and investors taking the cash from uninterrupted dividend growth over the period. “And the good news is we think we’re only starting.”

There’s little getting around the fact, however, that share price has been largely in the doldrums over the past five years – down 15 per cent during the period, while the FTSE 100 index in London, in which the company sits, has advanced almost 15 per cent.

DCC may have simplified its investment case over the past decade by selling its food and beverage businesses (including the Robert Roberts tea and coffee and Kelkin health foods brands) and recycling and waste management operations.

However, the main drag on the share price in recent years has been a concern about how most of its profits have been coming from the sale of fossil fuels, including oil sold for household heating and fuel pumped through its 1,175 petrol stations across Scandinavia, France, Britain and Ireland.

They didn’t like energy at one point. They loved tech at another stage but didn’t like healthcare. You’ve got to stick with what you believe is right and where you see the growth opportunities. We see growth potential in all our three sectors.

—  Donal Murphy

The DCC Energy division’s share of group operating profits grew to almost 74 per cent for the year to the end of March from 70 per cent for each of the two previous financial periods.

On the face of it, that would appear to fly in the face of the environmental, social and governance (ESG) investment movement. But a dramatic shift within that division has yet to be properly appreciated, according to analysts.

Murphy’s team has invested heavily in recent years – mainly through acquisitions – in products and services to help businesses and households make the green transition.

Last year, for example, the company installed solar panels capable of generating 150 megawatts (MW) of power, mainly for commercial and industrial customers. It announced on Tuesday that it is pushing further into the domestic market by acquiring UK-based Next Energy, an installer of solar panels, heat pumps and insulation for older British homes, for an enterprise value of £90 million.

The company now has pumps offering low-carbon renewable diesel (hydrotreated vegetable oil, or HVO) at 90 of its fuel service stations across Europe, including some of its Certa outlets in the Republic.

DCC now has electric vehicle (EV) charging capacity in a quarter of its fuel stations in Norway, where more than a fifth of all cars on the road are EVs.

All told, its so-called green transition services, renewables and other business (SRO) accounted for 35 per cent of DCC Energy’s earnings last year, up from 22 per cent two years earlier.

It’s more profitable business, too. DCC executives highlighted on a call with analysts this week that the operating profit margins on HVO and electricity pumped through EV chargers are higher than what it gets from selling petrol or diesel. Margins in SRO range from 10-15 per cent for solar panel installations to “30 per cent plus on energy management services” for commercial clients, they said.

DCC Energy is also continuing to expand its business in liquefied petroleum gas (LPG), seen as a transition fuel that emits less carbon dioxide than coal and oil – acquiring one of the largest LPG players in the German market, Progas, earlier this year for €160 million.

HSBC analysts highlighted DCC as a stock that is “misunderstood” by the market in a recent report on London-listed companies they believe are being overlooked by investors, saying the company is less a carbon-heavy business these days than an “energy transition enabler”.

DCC, at its heart, has prided itself from the time it was founded by Jim Flavin in 1976 as a master deployer of shareholders’ capital. The company’s original name, after all, was Development Capital Corporation.

The company said this week it is generating a healthy return on capital employed (ROCE) rate of 15 per cent on so-called SRO acquisitions carried out in recent times. They compare to an 18.7 per cent rate for the wider energy unit.

The same can’t be said for the group’s other two divisions: DCC Healthcare, a distributor of everything from vitamin-packed gummies to medical devices, and DCC Technology, which specialises in audiovisual equipment and consumer gadgets.

I’ve been in this business for 26 years and if we had listened to what people had told us we should get out of over the years we’d be in no business today

—  Donal Murphy

Healthcare operating profits division fell by 4 per cent last year to £88.1 million, driven by a drop in demand for its health and beauty products in the first nine months of the financial year amid the cost-of-living crisis and as business customers ran down stocks built up during and after the pandemic. Still, the business seemed to have turned a corner in the second half of the year.

Profits in the technology unit slid 13.6 per cent to £91.7 million, hit by what Murphy described as a “double whammy of a weak consumer and no kind of must-have technology products coming out during the period”.

The shaky performance of the two divisions dragged the group’s ROCE down to 14.3 per cent last year, compared with 17.1 per cent in 2021.

RBC analyst Andrew Brooke suggested in a note this week that while DCC Energy remains a bright spot and the stock price does not look stretched relative to earnings, the group needs its ROCE to stabilise to lure fresh investors.

He’s not a fan of the conglomerate nature of the group, either – even if few expect that to change any time soon.

“I’ve been in this business for 26 years and if we had listened to what people had told us we should get out of over the years we’d be in no business today,” Murphy told The Irish Times.

“They didn’t like energy at one point. They loved tech at another stage but didn’t like healthcare. You’ve got to stick with what you believe is right and where you see the growth opportunities. We see growth potential in all our three sectors.”