Energy business helps drive DDC higher

Ebookers looks set to follow into profit; Somerfield remains a risky gamble
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The Independent Online

For a company whose activities are so widespread, DCC has kept a low profile among investors. The Dublin-based distribution group, best known for shipping Microsoft's Xbox games console in the UK and Ireland, has seen its shares soar 50 per cent since October and it is not hard to see why.

For a company whose activities are so widespread, DCC has kept a low profile among investors. The Dublin-based distribution group, best known for shipping Microsoft's Xbox games console in the UK and Ireland, has seen its shares soar 50 per cent since October and it is not hard to see why.

Pre-tax profits grew 12 per cent in the last financial year, DCC said yesterday, on sales up 10 per cent. Operating cashflow rose 41 per cent.

Only about half of that profits growth was organic, and the impressive headline results also mask diverging performances among the company's four main divisions. That said, this largely vindicates the prudence of management's strategy in diversifying the business.

The principal driver was DCC's relatively immature energy business, which distributes a variety of fuels to homes and businesses, such as heating oil and liquefied petroleum gas. A host of bite-sized deals saw the division's pre-goodwill operating profits climb 50 per cent. And Jim Flavey, the chief executive, sees plenty more where that came from.

While similar stellar growth was achieved in the company's much smaller food distribution businesses, the picture elsewhere was less handsome.

Disappointingly, DCC's IT operations, supposedly the engine of future growth, put in a flat performance overall with negative organic growth. Mr Flavey blamed the poor show on the continuing slowdown in the formerly booming Irish technology sector. But, despite the hardware market slowing, he is confident that demand for software and peripherals will pick up the slack. Indeed, DCC has just 5 per cent of its target IT market.

A recovery in the global economy should deliver higher volumes and greater pricing power. Meanwhile, Mr Flavey sees plenty of opportunities out there to pull off a fresh spate of bolt-on acquisitions, allowing DCC to further exploit its economies of scale.

All the same, there are some lingering worries. DCC remains the subject of a recent legal action claiming its disposal of its large investment in Fyffes more than two years ago flouted insider dealing rules. The company has vigorously contested the lawsuit.

Continuing energy price volatility is another headache. Two years ago, a sharp rise in the oil price crippled margins in DCC's energy division.

Davy Stockbrokers anticipates pre-tax profits of ¤107m (£65m) in the current year, giving earnings of ¤1.10 per share, rising to ¤121m and ¤1.24 in 2004. The shares, down 5p at 815p, command a forward price-earnings ratio of 12. That looks too cheap for a company that has historically grown earnings at 20 per cent annually, and which is forecast to continue delivering double-digits increases ahead.

Tipped here at 460p a little over two years ago, the stock has further to go.

Ebookers looks set to follow into profit may have posted maiden operating profits last week, but it is still a pleasant surprise when a talks about going into the black. The online travel agent ebookers, hot on the heels of its better-known rival, yesterday indicated it was on track to post maiden profits in the third quarter.

The internet travel industry is growing at 50 per cent a year, so it is little wonder that ebookers's shares have shrugged of worries about the prospects for the travel industry after the 11 September terror attacks.

Indeed, the company revealed yesterday that four of its subsidiaries, including the UK and Ireland, had already become profitable in the first quarter. Losses before interest, tax, depreciation and amortisation were £1.3m, against £6.5m a year earlier. The company's cash position grew by £2.4m on the previous quarter to £22.5m. Cost savings after moves to base one-quarter of the company's 820 staff in India will come through from next quarter.

With the business achieving sales growth of 20 per cent a quarter, Dinesh Dhamija, the chief executive, is looking to sustain the momentum by acquiring rival outfits in Germany, France and Italy. Greater scale should enhance buying power and strengthen margins, and make ebookers a more attractive acquisition target.

Analysts expect pre-tax profits of £10m in 2003, giving the shares, down 10p at 141p, a forward p/e ratio of 7. While the stock has more than doubled since hitting a low of 68p last year, investors should resist the temptation to bail out now.

Somerfield remains a risky gamble

John Von Spreckelsen, the former Budgens boss now attempting to revive the fortunes of Somerfield, has always been an understated chief executive. Just as well given Somerfield's continuing travails.

He declared yesterday that phase one of the grocer's recovery strategy ­ the revitalisation of its shattered balance sheet ­ is complete. April saw a thorough refinancing of Somerfield's debt, enabling it to raise capital expenditure this year from £110m to at least £150m. More than 40 banks have been repaid, with just five now carrying the bulk of Somerfield's financing requirements for the next three years.

Not so long ago, many observers thought the company was on the verge of going bust, so Mr von Spreckelsen's achievements are significant. But as he himself says, there is a "stretching task" ahead in terms of restoring sales growth.

For the group as a whole, which includes the Kwik Save chain, like-for-like sales growth was just 0.6 per cent in the second half of the financial year, against 1.8 per cent over the full year. Kwik Save's underlying growth was 1.4 per cent in the second half; Somerfield achieved only 0.1 per cent.

The shares, down 3.5p at 128.5p, have had a good run lately on high hopes for Mr von Spreckelsen's main course. But with Sainsbury's and Tesco still attacking the convenience store market, the stock remains too risky.