Goldman upgrades DCC, highlights M&A growth

Goldman Sachs has upgraded DCC to ‘buy’ from ‘neutral’ and lifted the price target to 7,400p from 7,000p, saying recent underperformance provides an attractive entry point.

GS noted the shares have underperformed the Stoxx 600 by 15% since November 2016, mostly likely caught up in a broader sector rotation.

Its de-rating creates an attractive entry point for two reasons, the bank said. Firstly, it pointed to the fact that DCC is not a typical defensive stock, and secondly, it highlighted its significant M&A growth potential and superior returns profile, which it said warrant a premium valuation.

"For the last four reported years, consensus earnings per share estimates for DCC have been revised up by 13%, versus the Stoxx 600 down 18%. We believe M&A and consistent delivery of organic improvement will continue to drive these upgrades over time.”

Goldman reckons DCC has the financial headroom to spend close to £1bn on additional M&A over the next two years, based on debt and equity financing. It said that this, along with the pricing of its deals, could add 16% a year to earnings growth.

“At the same time, and owing to its operational efficiency and strong cash generation, we believe that DCC will continue to deliver cash returns significantly ahead of its business services and consumer staples peers.”

At 0907 GMT, the shares were up 1.1% to 6,280p.