Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 15/5/2012

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Turmoil in Euroland and elsewhere continues to overshadow the markets, which is a pity given that today has brought some encouraging updates from a number of plcs who presumably now wish they’d brought forward or delayed their results date!


Distribution and business support services group DCC issued its FY2012 results earlier today. The results contained few surprises, with  operating profits of €185m coming in towards the higher end of the guided range of €175-190m. Free cash flow, which DCC defines as operating cash flow after net capex, interest and tax, came in at €146.0m, well ahead of the €123.3m out-turn in the previous year. After taking acquisition spend of €168.1m and dividend payments of €63.2m into account, net debt rose from €45m to €128m. Despite this increase DCC’s net debt is still only 0.5x EBITDA, which highlights the financial strength of the group. Across its business units the performance was mixed, as can be seen here:


  • Energy (45% of group profits in FY12) – operating profits fell 38% yoy as a mild winter resulted in abnormally low demand for heating oil (DCC is the biggest distributor of home heating oil in the UK and Ireland). Total heating related volumes declined by circa 15% on a like for like basis compared to the prior year (which had an abnormally cold winter, thus exacerbating the base effects).
  • SerCom (29% of group profits) – operating profits rose 17% due to a combination of organic growth and the contribution from acquisitions.
  • Healthcare (13% of group profits) – underlying operating profits rose 5%, helped by what appears to be strong growth in sales into UK hospitals.
  • Environmental (8% of group profits) – profits rose 25% due to contributions from acquisitions.
  • Food (5% of group profits) – profits fell 7% due to the loss of a chilled distribution contract.


In terms of the outlook, DCC expects growth of 20% in both operating profit and EPS in the current financial year, with the main driver of this being an assumption of ‘normal’ winter weather. Based on the share price at the time of writing (€19.74) this puts the group trading on just under 10.1x forward earnings – which to me appears too cheap for a group with: (i) leading market positions in its key segments; (ii) a very strong balance sheet with ample scope to support earnings-enhancing acquisitions; (iii) a track record of generating consistently high returns; (iv) relatively low risk due to its diversification both by geography and industry into what are mostly defensive areas.


Elsewhere, Irish investment vehicle TVC Holdings also released its full-year results today. The results themselves were good, but updating the valuation to reflect the current situation underlines the value in this stock here. Based on where the shares closed at this evening (85c), this means the group is capitalised at €85.9m. Stripping out TVC’s cash and German bonds (€72.6m) gives a residual enterprise value for the group of €13.3m. For this you get: (i) unquoted equity investments valued at €11.7m; and (ii) an 18% shareholding in UTV Media plc which based on the current share price (£1.32) and exchange rates is worth €28.5m. Put another way, TVC’s NAV per share of €1.14 is significantly above its current market price.  What I would say is that while the ‘quantitative value’ in TVC is quite clear, given the discount it trades at relative to its ‘book value’, this makes no allowance for the ‘qualitative value’ of its excellent management team, which has a phenomenal track record when it comes to picking winners (TVC has previously sold significant stakes in Norkom, Changingworlds and Havok, to name but three successful exits, for many multiples of what it paid for them).


In the UK pub sector, Enterprise Inns released its interim results today. The group, which operates 6,143 pubs, said that average income per pub rose 3.2% in the first 6 months of its financial year, with like-for-like revenues in the substantive estate +1.5%. In terms of the outlook, like many of its quoted peers it sees Euro 2012, The Royal Jubilee and the Olympics as potentially supportive for trading. So, pretty comforting read-through for the wider sector.


From a macro perspective, PIMCO sees China’s growth rate at a 13 year low, Moody’s turned more negative on Italian banks, while as one wag puts it, having founded democracy, Greece likes it so much that it’s going to run its second set of elections in a month. I imagine that central bankers this evening are thinking about launching another bout of quantitative easing to hide these problems for a while!


And finally, did you know that Somali pirates cost the global economy almost $7bn last year?


Written by Philip O'Sullivan

May 15, 2012 at 5:23 pm

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