Recent Sell-off Represents an Opportunity

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1 DCC - Outperform Template Friday,8th December 2016 Recent Sell-off Represents an Opportunity (DCC LN) Wednesday, 26 th July 2017 Closing Price: Key Metrics 2018e 2019e 2020e P/E 21.8x 18.8x 18.1x Revenue ( bn) EBITDA ( bn) EPS Dividend Yield (%) Share Price Return 1 Mth 3 Mth YTD CRH -3.5% -5.9% 12.9% ISEQ -2.0% -2.1% 3.29% Source: Bloomberg, CFI Research Top 5 Shareholders Ownership Fidelity 10.2% BlackRock 9.45% Allianz 6.96% Capital Group 5.04% Mawer AM 4.0% Source: Bloomberg DCC 1 year share price Recent Weakness DCC s recent weakness represents a good buying opportunity in our opinion. It remains in our Core Portfolio and consistently produces solid results. We have a high degree of confidence in management who have an excellent track record and we see nothing currently that would result in us changing that view. Reasons for Weakness The has been no real stock specific news of late so it is somewhat difficult to get a handle on what has been driving the weakness. Undoubtedly it has been caught up in the wider European sell off. Some other possible reasons are laid out below: The lack of news may actually be a drag on the stock with analysts expecting some M&A activity. The most recent IMS was very light in detail which didn t help. DCC reports in sterling so GBP weakness should help as any Irish or European revenues look better for the bottom line. Also the last quarter was the first time more than 50% of revenue came from Europe. However, investors still may think of DCC as a UK and Ireland centric stock which means sterling weakness and Brexit related pessimism may be playing a part. It could simply be the market waiting to see what happens post Tommy Breen leaving. We didn t think there was going to be an M&A announcement for Mr Breen s last quarter. But market may be waiting to see if the new CEO s first quarter is followed by some M&A news. Lastly DCC has a negative working capital days model lately which means when the oil price declines it is actually advantageous to DCC. The reverse is true when oil price moves up. Oil has moved higher recently but not by much. We don t think this is a sizeable factor in the recent sell-off. The stock was up 30% YTD at its high in June. Some profit taking was inevitable. Investment Case Remains Solid We believe the recent sell-off is now overdone and represents a good buy in point for clients to increase exposure. Our investment thesis is summarised below: Source: Bloomberg DCC is a sales and distribution business with operations in various sectors including energy, IT, healthcare and food & beverage. Consistent historical track record of earnings beats and subsequent upgrades. DCC maintains a net debt/ebitda position of 0.92x and has 1.04bn in cash on the balance sheet. It remains in a very healthy state for further acquisitions. Management has previously stated that it will continue to remain selective choosing high quality assets that will be earnings accretive in a short space of time. The M&A pipeline remains healthy. Most majors are in the process of divesting these downstream assets and retail operations. DCC has already done deals with some of the majors and remains one of the prime candidates that majors will look to when offloading these assets. Low acquisition failure and integration risk management s track record from this perspective is excellent. From a longer term growth perspective its recent move into EM with Shell s Macau and HK LPG business is very encouraging. Potential leverage and synergy opportunities between the Gaz Europeen and Butagaz brands in France could have a material impact on revenue. Will Heffernan Investment Analyst +353 (1) wheffernan@cantor.com We have included a technical update below as it is crucial to price action both recently and in the near term. We have also highlighted some recent buying and selling that backs up our thinking that the retracement is overdone. Finally, we have detailed the potential risks to our investment thesis. 1

2 Technical Update Below is a 1 year price chart of DCC along with some technical indicators: The technical picture remains negative in the short terms but we believe the sell-off is overdone at this stage. The stock has traded down 9.8% since its high at the start of June. It rallied slightly in mid-june to the tune of 2.56% but has since come off again. The red arrow on the top chart highlights the last update advising clients to buy in at that level. The rally petered out and it is currently pricing at The major levels of support at and 200 Daily Moving Average (DMA) at Also the bottom of the Aug-Oct range represents a solid level of support. If it continues in its negative trend the 50 DMA should cross the 100 in the short term (golden circle in chart). This would be a bearish signal and may induce a further decline. Technicals are still negative in the short term with a MACD cross below the 0 line and RSI still trending down. Wider Market View Below are market expectations for DCC detailing consensus price targets and other investment houses ratings. These are indicative of analyst sentiment towards the stock. 18.3% upside to consensus price target at the minute. This is significant upside. In our opinion the retracement is overdone. 12 buy ratings, 2 holds and no sells implies the stock is still a conviction buy. All charts sourced from Bloomberg 2

3 Recent Buying & Selling We have included some data on recent trading to highlight our belief that the recent weakness is overdone at this stage. Data below is sourced from Bloomberg and shows the top holders, buyers and sellers of DCC stock recently. Percentage of market cap held is the third column in from the right. The column to the right of that is recent trading. Top Holders Top holders have not reduced position significantly and have used recent weakness to increase positions.. Top holder Fidelity have done very little selling recently. Blackrock used the weakness two days ago to increase its holding. Allianz did similar two weeks ago. There has been very little selling from top holders indicating it remains a conviction buy from them. Recent Top Buyers Recent top buyers are all large well-known financial institutions. All position information sourced from Bloomberg 3

4 Recent Buying & Selling Cont d As shown previously Blackrock used the weakness to top up their holdings. The weakness two weeks ago was used by all the following names to increase positions HSBC, Morgan Stanley, Allianz and Vanguard. Recent Top Sellers The largest recent sellers were all holders who did not have substantial position sizes. The 2nd biggest seller is a systematic asset manager. This implies that price action may have been the reason for it selling down the position and not a change to fundamentals or the investment case. Deutsche Bank, Dimensional and Aviva drove the majority of selling. All of that occurred two weeks ago in early July. Reduced profit taking on recent rally indicates houses who bought the dip recently were topping up long-term positions. Dimensional is a systematic fund manager and would do a lot of rulesbased trading. Dropping through the 50DMA, followed by 100, or just reaching a certain profit trigger on the trade could have caused this house to reduce positions. For houses like these, selling decisions are not necessarily driven by changes in the investment thesis or a deterioration in company fundamentals. Risks to Investment Thesis We believe the below risks are low probability events and are unlikely to intensify in the future. However, we believe it is prudent to lay out the major possible headwinds to our investment case. Oil price volatility - in our opinion this not a major risk. Milder weather across Europe moving into Autumn and Winter - unknown at this point in time. Some FX translation risks and input pricing risks from sterling volatility. Failure to carry out M&A could lead to negative sentiment for the stock - again based on historical analysis we believe this possibility is remote. Failure to integrate any new acquisitions properly and on time - management traditionally has an excellent track record in this regard making this scenario unlikely. Transition risk - the new CEO, Donal Murphy, is a DCC stalwart, there since 1998 and led the Energy division during its growth phase. The business model is of a high standard and this is unlikely to change. Possibility of senior staff departures due to the boardroom shuffle - unknown at this point in time. All position information sourced from Bloomberg 4

5 Wednesday, 26th July 2017 Regulatory Information Issuer Descriptions: (Source: Bloomberg) DCC: DCC is a sales, marketing, distribution and business support services company Historical Record of recommendation DCC: We have an Outperform on DCC as of 17/8/15 changing to Outperform from Not Rated. None of the above recommendations have been disclosed to the relevant issuer prior to dissemination of this Research. Date of distribution The first date of distribution is the same date as this report unless otherwise specified. All regulatory disclosures pertaining to valuation methodologies and historical records of the above recommendations can be found on the Cantor Fitzgerald Ireland website here: This material is approved for distribution in Ireland by Cantor Fitzgerald Ireland Ltd. It is intended for Irish retails clients only and is not intended for distribution to, or use by, any person in any country where such distribution or use would be contrary to local law or regulation. 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