Eight months ago, DCC chief executive Donal Murphy said he was “very confident” that the group’s all-in bet on the green energy transition would secure its status as Ireland’s last remaining member of the prestigious FTSE 100.
If only the stock market shared that conviction today.
DCC completed a £600 million (€690 million) share buyback in December after finalising the sale of its healthcare unit months earlier. This reduced the group’s number of shares in issue by about 12 per cent.
Since then, however, £400 million has been wiped off the group’s market value – leaving it hovering in recent weeks between the fourth and sixth smallest company on the FTSE 100.
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There are five companies – including online financial trading firm IG Group and asset manager Aberdeen Group – in the second division FTSE 250 that have a higher valuation than the Dublin-based company.
Its position will become even more precarious if the group proceeds with another large share buyback once it sells its technology division this year. That’s unless investors start buying into the attractions – according to analysts, at least – of its remaining energy business, and soon.
Falling out of the FTSE 100 – a club that DCC first joined a decade ago – would force passive funds that track the index to sell the stock. Some hedge funds may already be getting ready. Investment bank Panmure Liberum noted this week that bets on the stock falling, through the taking of so-called short positions, have been increasing of late.
It follows the exits from the FTSE 100 in recent years of Irish heavyweights CRH, Flutter and Smurfit Kappa (now Smurfit Westrock), as they moved their main listings to New York.
Sentiment towards DCC hasn’t been helped over the past 12 months – when the stock lost close to a fifth of its value – as the sale of its former healthcare division, spanning vitamin gummies to the supply of medical devices, achieved less than hoped and investors lowered their expectations of what the tech division might realise.
The £1.05 billion enterprise value of the healthcare deal with private equity fund-owned HealthCo Investment last April fell well short of the £1.3 billion to £1.6 billion some analysts had expected.
While DCC makes much of its earnings from the sale of petrol and diesel through its network of about 1,175 petrol stations and sale of heating oil in Europe, it has been seeking for some time to position itself as a green transition play.
Murphy sees it as a consolidator in sectors such as liquid gas – widely considered the cleanest of the fossil fuels – on both sides of the Atlantic, and biofuels and solar panels in Europe.
Goodbody Stockbrokers analysts Kenneth Rumph and Shane Carberry said in a report on Thursday that the growth capacity of DCC was “underappreciated” by the market, with the stock trading at a 25 per cent discount to their €60 price target.
They say DCC’s deals in recent months to spend close to £100 million buying liquid gas businesses in the UK, Austria, the Czech Republic, Hungary and Slovakia show “both the scope and the attractiveness” of focusing on the core energy business.
The bolt-on acquisitions are expected to add 1 per cent to the group’s earnings per share. The analysts reckon the group has the capacity to spend about £290 million a year by the end of 2028 on more purchases – after allocating money for dividends and buy-backs.
Murphy said in late 2024 – as he unveiled plans to narrow DCC’s focus to energy after five decades of investing in a range of sectors – that he expected returning surplus cash arising from asset sales to shareholders.
But what if DCC abandoned is plans to use money from a sale of its remaining tech unit on buying back shares – which would almost certainly drive it out of the FTSE 100 – and doubled down, instead, on M&A in energy?
The Goodbody analysts have done the maths. They reckon DCC could easily spend a further £300 million a year on energy deals over the medium term with the expected £650 million total proceeds from the sale of the tech assets and a distribution centre in England – and the help of a bit of debt leverage.
The current expected proceeds from the tech division are well below estimates of more than £1 billion that some investment houses, including Deutsche Numis, had initially put on the division.
The group sold a small part of the business – its information technology distribution business in Ireland and Britain – to German-based private equity group Aurelius in November in a deal worth £100 million.
It has racked up tens of millions of pounds of impairment and restructuring charges elsewhere in the division in the past year to try to pretty it up for sale.
The Goodbody analysts estimate that reinvesting cash from offloading the tech unit could see DCC’s underlying earnings per share surging by 33 per cent by 2029. By contrast, earnings would only rise by about 12 per cent through organic growth or 23 per cent if M&A is not turbocharged.
A strong signal of ambition from Murphy that the tech money will be used for real earnings per share opportunities – rather than reducing shares through another buyback – could trigger a re-rating in the stock, observers say, and snuff out FTSE 100 relegation speculation.
He has a chance to lay down that marker in the next fortnight when DCC issues its next trading update. Will he take it?
