Energy and healthcare firm DCC (LSE: DCC) is one of the London market’s greatest success stories. Over the past five years the company, which started out as a coal distributor, has expanded into new markets through bolt-on acquisitions and organic growth, reinvesting profits back into the business to accelerate its expansion.
Between the company’s fiscal year ended 31 March 2013 and 31 March 2017, earnings per share expanded by 68% or a mid-teens percentage every year. Analysts are expecting this growth to continue for the next two years at least with earnings per share growth of 13% pencilled-in for this fiscal year and further growth of 13% for the year ending 31 March 2019. Considering this, it’s not surprising that the shares trade at a forward P/E of 22.
If the company hits these targets, management will have successfully grown earnings per share by a compound 113% since 2013 — not bad for a company with just over £13bn in revenue.
Growing through acquisitions
DCC has changed significantly over the past five years as the company has pursued its growth and diversification strategy. Management has pushed it to diversify away from energy towards healthcare and technology distribution, which has helped the group de-risk its business portfolio. Of the £12.3bn in revenue the company reported a for fiscal 2017, £3.2bn was derived from non-energy businesses. That said, energy still constitutes a huge portion of DCC’s earnings, and it is the fastest-growing part of the business. DCC energy reported a 24.3% increase in operating profit for 2017 while the healthcare and technology arms reported growth of 8.7% and 17.1% respectively.
The energy division is growing the fastest because that is where the company’s experience lies and management is trying to broaden the company’s horizon by investing overseas. Leveraging its expertise in the UK, last year the company deployed £550m for acquisitions including the agreed acquisition of Esso’s retail network in Norway, and the approved purchase of an LPG business in Hong Kong & Macau, DCC’s first material step beyond Europe.
There are likely to be plenty more of these acquisitions as it continues to expand. The company is highly profitable, generating an average return on capital employed of 20.3% last year, down slightly from the 21% reported in the year-ago period. What’s more, the majority of net profit is converted into cash flow. Free cash flow totalled £416m for 2017, up 43% year-on-year. Dividends took just under £100m of this amount, leaving around £316m for acquisitions, which the company used, as well as some debt, to continue its expansion plan.
Further growth ahead
As long as management continues to seek out the best acquisitions, prioritise free cash flow and ensure the group’s return on capital employed remains in double-digits, there’s no reason to doubt that DCC cannot continue on its current growth trajectory.
Net debt of £122m is relatively insignificant compared to group equity of £1.5bn, and if management decides to curtail acquisition activity, the debt could be eliminated in one-quarter. Put simply, DCC has all the hallmarks of a top growth stock, and there is little reason to doubt the company going forward.
