DCC have issued an IMS this morning in which management have reduced their guidance in terms of operating profit and earnings per share guidance for the full year period. Management are now guiding for operating profits and adjusted earnings per share to increase by 7-10% (prior guidance: operating profit +15%, adjusted earnings per share +13%). <p>
The principal reason for the reduction in guidance is due to the more subdued performance for the DCC Energy division versus estimates. The weaker than expected performance of DCC Energy was driven by milder than expected weather in the UK during the final month of 2013 and also a mild backdrop so far in 2014. Average temperatures in December were 2 degrees warmer than the 10 year average while January temperatures were higher by .8 degrees negatively impacting demand. <p>
The other divisions of DCC performed in line with prior guidance with Sercom experiencing a strong trading period around the key Christmas trading period. DCC Healthcare also saw an improvement in trading levels driven by a continued strong contribution from recent acquisitions. DCC Environmental and DCC Food and Beverage traded modestly ahead of prior year levels, in line with the growth profile that the businesses have experienced in the current fiscal year. <p>
On a positive note the acquisition spend for DCC has increased in recent months with DCC spending £66 million since the end of September. The acquisitions included the Qstar business in Sweden (Enterprise Value: £40 million), 13 retail petrol stations in Scotland (Enterprise Value: £8 million), a UK distribution business for Sercom (Enterprise Value: £5 million) and Universal Products Manufacturing for DCC Healthcare (Enterprise Value: £13 million). These acquisitions mark an increase in spending levels which is positive for DCC entering FY 2015 with the total committed spend in the current fiscal year amounting to £85 million (H1: £19 million). <p>
Overall, while the profit warning is a near term negative, the market had been factoring in a reduction in profit forecasts. Taking the midpoint of the company’s new guidance, operating profit forecasts will amount to £203 million (merrion: £215 million) while the benefit of a lower tax rate will see earnings per share amount to c.186p (merrion: 194p). The negative impact of the mild weather was £11 million versus a normal winter period (£15 million versus last year) which compared against our back of the envelope forecast of a negative impact of £10 million should the mild weather persist. While the share price reaction will likely be weaker this morning, we would note that the acquisitions announced this morning will boost profitability going in to FY 2015 by c.£8 million (merrion FY 2015: £225 million), boosting operating profits by 3.5%. <p>
We continue to view DCC as a very attractive group, with a strong business model in place and an excellent management team with a track record of delivering consistent growth. We would recommend buying the shares on any weakness.
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