DCC is a company we care about because you probably don’t.
In spite of being a FTSE 100 fixture with an enterprise value of nearly £5.5bn, the Dublin-based oils-to-splints-to-cameras distributor rarely attracts much attention. Full-year results released today have been picked up by the Irish press and ignored by nearly everyone else. On LSE’s website the statement was the day’s 20th most-read RNS, trailing behind relative minnows including Shoe Zone, Angling Direct and toilet paper maker Accrol.
Here at FT Alphaville we care about DCC because it’s weird. Some ways in which DCC is weird were highlighted in a long post in February, to which we’ll add one chart:
Odd, right? Why would a company keep borrowing huge amounts of cash year after year just to park it in the bank?
DCC says it maintains a strong balance sheet for “many strategic and commercial benefits”, including to provide nimbleness around acquisitions and opportunistic investments. At the March year end it had £1.4bn of cash ready to deploy, as well as more room to borrow. Net debt (excluding leases) had risen from £419.9mn the year before on the back of 19 acquisitions but remained fairly low at £767.3mn, or about 0.9 times Ebitda.
Flexibility is expensive, however. DCC’s net interest expense before exceptional items rose from £54.1mn in the 2022 fiscal year to £80.6mn in 2023. In effect, the company paid £96.7mn in interest to earn £16.1mn in interest.
It might also seem a bit surprising, given all the idle money sitting around, that DCC uses reverse factoring. Per the results:
DCC Technology selectively uses supply chain financing solutions to sell, on a non-recourse basis, a portion of its receivables relating to certain higher volume supply chain/sales and marketing activities. The level of supply chain financing at 31 March 2023 decreased by £16.9 million to £151.1 million (2022: £168.0 million). Supply chain financing had a positive impact on Group working capital days of 2.3 days (31 March 2022: 2.3 days).
This is only slightly odd. Electronics suppliers often use supply chain financing when extending credit to large retailers, with DCC first disclosing the strategy in 2012 as part of an international expansion drive. It’s also a small facility in the context of the group, whose receivables balance was £2.3bn at the 2023 year end.
Nevertheless, when an ongoing contract dispute in the US has raised allegations about irregular book-keeping at the same division, and when there’s already £1.4bn on hand that’s earning less than nothing, invoice sales that quicken working capital conversion by two days and seven hours might appear a bit unnecessary. Why bother?
(Asked about reverse factoring, DCC did not offer a comment.)
To be sure, working capital can be lumpy for all distribution businesses. DCC’s fuels operations provide 70 per cent of group earnings and are heavily reliant on the winter months; the period-end cash snapshots in September and March may not fully capture movements in stuff like inventories and advance prepayments.
The ultimate test is whether a business keeps throwing off cash, which DCC definitely does. A total recommended dividend for 2023 of 187.21p per share means, according to the company, the 29th consecutive year of growth:
And yet. For a company that’s as focused on returns as DCC to keep leaving so much on the table in the form of costly cash reserves seems . . . well, it’s all just a little bit weird.
Further reading:— A ramble through the DCC multiverse (FTAV)
