DCC‘s (LSE:DCC) a FTSE 100 sales, marketing, and support services company. And I think there’s a lot of hidden value in its shares.
Earlier this month, news that it plans to try and unlock this value by selling one of its divisions sent the stock up 10%. And I think there could be more to come.
Hidden value
Officially, DCC shares trade at a price-to-earnings (P/E) ratio of 17, which is above the FTSE 100 average. But the company doesn’t think this is an accurate reflection of its value.
In its financial statements, the firm offers a measure of profitability based on excluding one-off costs and amortisation expenses. On this basis, the share price implies a P/E multiple of 14.
Management therefore thinks the stock is cheaper than it looks. And instead of waiting for the market to realise this – which might never happen – it’s taking action to unlock this value.
DCC has three operating divisions – energy, healthcare, and technology. The plan is to focus on the energy business, which management thinks has the strongest growth prospects. In order to do this, management’s looking to sell the healthcare business and is conducting a strategic review of the technology division. The proceeds will be returned to shareholders.
The question then, is what investors might hope to get from the sale and what they will be left with after. And I think there are promising signs in both cases.
Returns
The healthcare unit and the technology business are on track to generate around £75m each in operating income this year. And DCC might hope to realise eight times this in a sale.
That would mean £600m – or 11% of the current market-cap – as an immediate return for investors. But the more interesting question is what shareholders would be left with.
DCC’s energy business has generated £515m in operating profit over the last 12 months. Importantly, the company’s latest update indicates it’s growing at around 7%.
Subtracting the return from the sales of the other units from the current market-cap leaves £5bn. I don’t think that’s a lot for a growing business generating £515m in operating income.
There are clear risks here. One is that DCC might not receive the kind of offer it’s hoping for – while the firm believes its healthcare business can grow, it hasn’t done so recently.
Another issue’s more certain. Selling off the other divisions will inevitably incur fees, which will weigh on what shareholders get back from the sale.
An opportunity?
Investors clearly think DCC’s plan is a good one – the stock has gone from £48.48 to £56.70 as a result of the news. And despite the potential risks, I agree.
The jump in the share price makes it less attractive than it used to be. But with a clear catalyst for realising the hidden value, I think this should definitely be on investor radars.
I don’t own DCC shares at the moment, but that could well be about to change. For now, I’m weighing it against a few other FTSE 100 stocks before making a final investment decision.
This post was originally published on Motley Fool
