DCC cuts growth estimate over mild weather

Energy-focused support services group DCC has lowered its full-year profit guidance, despite seeing a strong first-half performance.

The Dublin-based group, which has been listed on the London Stock Exchange since last year, yesterday reported a 6.4% increase in operating profit (before exceptional items) for the six months to the end of September, to £73.2m (€93.2m).

Adjusted earnings per share were up by 7.2% to 62.53p, net profit was 3.1% ahead of the previous year’s first half at £60.3m, and group revenue showed a near 2% annualised jump to just over £5.5bn.

Despite noting the seasonally less significant aspect of the group’s first half, chief executive Tommy Breen said: “DCC Energy’s operating profit was modestly behind the prior year as its business was impacted by the very mild weather during the period, particularly in the relatively important months of April, May, and September.”

The energy division represents more than 50% of DCC’s annual earnings. Its first-half operating profit was down 5%, year-on-year, at £31.9m. Excluding this unit, the group’s first-half operating profits grew by just under 17%, on a year-on-year basis, as each of its other four divisions (environmental, Sercom, healthcare, and food and beverage) each reported growth, in some cases ahead of estimates.

“Good progress was made in the pursuit of the strategic objectives, in particular through the acquisitions of the Esso Express, Williams Medical, and CapTech businesses and the disposal of the group’s Irish food and beverage subsidiaries,” Mr Breen said, adding that the overall business “remains very well-placed to continue the development of its business in existing and new geographies”.

However, due to the milder weather this year, management has downgraded full-year earnings growth.

Previously it anticipated 10%-12% operating profit and adjusted earnings per share, while now it sees growth being between 5% and 10% for the year to the end of next March.

That news may have brought about a slight dip in DCC’s share price yesterday — down by around 1.3% in London — but analysts did not seem too spooked.

David O’Brien of Goodbody Stockbrokers — which has a ‘buy’ recommendation on the stock — said short-term upside in the share price may be limited, but such an earnings downgrade should be one-off in nature.

Davy Stockbrokers’ Allan Smylie, meanwhile, said DCC’s interims were better than expected and reflected strong underlying performance across all divisions. He said the lowering in annual guidance is not surprising, given recent weather patterns, and is just “short-term noise”.

“Our investment thesis on DCC centres on high and stable core returns, material balance sheet capacity, and a track record of merger and acquisition that suggests earnings growth will materially outpace the market in coming years,” Mr Smylie said.

“The colder weather last year had an estimated £6m positive impact on profits, and milder temperatures this year provided an estimated £5m headwind, resulting in a net year-on-year impact of approximately £11m. The organic growth number, therefore, reflects a strong underlying operating performance as well as growth in the non-heating segments of the market.”