When this column recommended buying shares in DCC in late September, the price stood at £70. In the weeks that followed, the stock sank, to £55.55 in late November. The shares have recovered ground since, but are trading below their level at the time of the recommendation. Any investors who followed it will be out of the money and have reason to feel grumpy. Is it time for an apologetic mea culpa from this columnist or does the “buy” call still stand?
DCC was founded as Development Capital Corporation in Dublin in 1976. Its venture capitalist creator, Jim Flavin, expanded it through acquisition and turned it into a powerful private equity investor. Having changed tack during the early 1990s, turning itself into an industrial holding company, DCC listed on the London stock market in 1994. It employs about 12,500 people, is still in Dublin, and has become a constituent of the FTSE 100 index with a valuation of £6.5 billion.
One of the characteristics that attracted this column to DCC was its diversity. It operates four divisions and the largest, LPG, sells gas and electricity to households and businesses in Europe, Asia and, most recently, the United States. Its retail and oil unit sells transport fuels and heating oils in Europe; technology supplies products from smart TVs and mobile phones to individuals and commercial resellers in multiple geographies; and healthcare sells pharmaceuticals and medical devices, mostly in Europe.
If anything, this attractiveness has deepened. All four divisions reported substantial rises in operating profits last year, particularly LPG and technology, where they rose 20.5 per cent and 35.1 per cent respectively.
Another allure was DCC’s acquisition strategy, which has been relentless but disciplined and infused with its private equity heritage. It has spent about £3 billion buying roughly 270 companies during its 25 years as a listed business, about £370 million of it in the year to the end of March.
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The group is as compelling as it was, possibly more so. Less than 18 months ago, DCC had no businesses in North America; now, it channels about 13 per cent of its capital into the region and is showing that its consolidation-led approach is working. In April it bought Pacific Coast Energy, an American propane specialist, in the first bolt-on acquisition by its LPG unit since it joined the US market. Its technology and healthcare divisions have similarly agreed deals in America during the past 15 months.
It remains hard to fault DCC. About a third of its growth is being generated organically, suggesting that it is not reliant on acquisitions to generate momentum, and it passes muster on a string of metrics, not least uninterrupted annual dividend increases during its 25 years as a listed business. So should investors be put off by the recent weakness of the shares, up 62p, or 0.9 per cent yesterday to £66.68? This column would argue not. The market has historically been nervous about DCC’s exposure to energy and the worry that unseasonably mild weather will depress earnings in both the LPG and retail and oil divisions.
That comprehensively failed to happen in the year to the end of March, however, and the strong performance in both divisions was partly because DCC has moved into wider energy markets — transport, aviation and lubricants — making it less vulnerable to weather changes.
DCC’s relative underperformance in share price terms has also made for a tempting valuation. The stock trades for about 18 times RBC Capital Markets’ forecast earnings and the yield is about 2.1 per cent.
The excitement is still there. This is an opportunity.
ADVICE Buy
WHY Highly disciplined with strong growth prospects and an attractive valuation based on recent price weakness
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Sanne Group
Sanne Group is one of those companies whose name is highly likely to illicit a blank look from people who don’t own the shares. Yet it is a near-£1 billion business with a position in the FTSE 250 whose activities underpin a good deal of what takes place daily in the City.
Established in Jersey in 1988, Sanne is best described as a funds administrator, which means it carries out the back-office paperwork, compliance, reporting and other management duties that the companies it works for don’t want to do themselves. Its customers include hedge funds, investment firms, family offices and corporations.
It has grown extremely rapidly since it listed in 2015 through a placing at 200p a share. Its workforce has swollen from 270 then to more than 1,400 today; it has made seven acquisitions and vowed to do more.It has more than 1,750 customers in 18 jurisdictions and oversees assets totalling £240 billion.
The investment case is pretty straightforward. As the regulatory burden on fund managers increases, including the complexities of cross-border trading, the more likely they are to turn to a third-party to take responsibility for the headache for them, for a fixed fee.
As a sector, fund administration is highly fragmented so there are plenty of opportunities to pursue acquisitions to supplement organic growth. Because its job is a skilled one, customers tend to be loyal, meaning that much of its revenues are recurring. That means winning new clients is no easy task of course, but Sanne secured a record number of new orders last year, equivalent to annualised revenues of £24.5 million.
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Its life on the stock market has been by no means plain sailing. Over the past year and a half, investors have been unsettled by the departure of both the chief executive and the finance director, albeit smoothly handled, and a disappointing trading update in January that massaged down annual profit expectations in the light of high investment costs.
The shares, up 5p, or 0.7 per cent, to 685p yesterday, have more than tripled since the listing. Trading on a multiple of 23 times Liberum’s forecast earnings for a yield of about 2.2 per cent, they look well valued.
ADVICE Avoid
WHY Highly respectable growth business but shares look fully valued