It is not only the small independent oil companies in the North Sea that are doing well from the oil majors’ need to sell assets and cut borrowings to ride out the low oil price. DCC, the Irish distribution conglomerate, has just done its second biggest deal, buying Esso’s chain of Norwegian petrol stations for £235 million.
This adds to purchases in Denmark, Sweden and France, where late last year DCC bought Gas Européen Holdings, to add to the 2015 purchase of Butagaz, which supplies liquefied petroleum gas and is still the biggest deal so far.
DCC, one of those FTSE 100 constitutents that few outside the City will have heard of, is almost entirely in distribution, although there is a small contract manufacturer of beauty products for the likes of Body Shop and a waste management business. Almost 70 per cent of profits already come from energy. This is not a deliberate policy but is where the deals are arriving from, DCC having bought Butagaz from Royal Dutch Shell. The Norwegian business will provide an attractive return on capital of 15 per cent in the first full year.
The group still has a relatively low market share in oil and gas in Europe, which suggests that there is more growth to come, even if the supply of deals is by its very nature unpredictable.
DCC accompanied the acquisition with a third-quarter trading update that indicated it was on course to deliver another sharp increase in profits in the year to the end of March.
The energy side is affected by the weather and the third quarter provided a satisfactory outcome, mild conditions in Britain and Scandinavia being balanced by colder ones in France. The company warned in November that the low pound would be a drag on its healthcare business because some medicines are sourced in euros and then sold in Britain.
Distribution of technology brands such as Microsoft and Samsung to big retailers such as Argos and John Lewis was strongly ahead, benefiting from an earlier acquisition. If the shares, up another 360p to £67.35, have a fault, it is that they are very highly rated, selling on 23 times earnings. They look a good bet in the long term, but immediate upside may be limited.
My advice Buy
Why The shares are not cheap and this is very much a long-term prospect, but DCC’s growth record is impressive, with more to come
St Modwen Properties
Now is probably as good a time as any for St Modwen to line up a buyer for its half-share in the New Covent Garden development in south London, even if the site will not be available for vacant possession until the summer. The shares have suffered like any other in the UK-focused property sector and are only just back to where they were before the referendum, but the lower pound will have attracted interest from overseas.
St Modwen, meanwhile, is in a state of flux. The company gets half of its business from housebuilding, while a joint venture there with Persimmon is being wound down so it will increasingly go it alone.
Mark Allan arrived from Unite, the student accommodation specialist, in the autumn and is promising a full review of the portfolio. He has the option of selling the Swansea Bay student campus as well, which, with the New Covent Garden disposal would cut debt, by some measures a little on the high side.
He might then address the dividend policy, which is not overly generous. St Modwen was forced to write down the value of New Covent Garden last year, but it should bring in its book value of approaching £100 million.
Net asset value per share was comfortably ahead at 460.5p at the November end of the financial year, while the company’s homes business pushed up profits by 49 per cent — and this is where the opportunities lie. The shares gained 5p to 327p, but the discount to that net asset figure still looks too great.
My advice Buy
Why Probable asset sales will fund furher growth
FirstGroup
The problems at FirstGroup’s UK bus business seem to be shared across the industry rather than down to the company’s performance, but they look pretty intractable. Not only is there a macroeconomic effect, as falling consumer spending hits the number of people visiting the high street, but the appalling congestion in so many large cities is also dissuading people from travelling at all.
Bus revenue, on a like-for-like basis, continued to fall in the third quarter. even if the rate of decline began to slacken, while the British rail operations were hit by earlier changes to franchises. In the United States, the revival of Greyhound is encouraging, with the first increases in revenue since late 2014 helped by cleverer charging mechanisms.
The problem for FirstGroup is that £1 billion-plus debt, which is being reduced at a rate of approaching £100 million a year. This does not suggest any immediate return to the dividend list and debt reduction is plainly a higher priority. The shares rose 7¼p to 111¼p on that better news from the US and sell on nine times earnings, but it is hard to see any obvious catalysts for progress.
My advice Avoid
Why With no dividend in sight, no real reason to buy
And finally...
The refinancing of Premier Oil is positive for Rockhopper, its partner on the Sea Lion field in the Falklands, but the hard work starts here. Rockhopper said yesterday it was time to proceed with “the commercial, fiscal and financing elements” of the prospect, which means bringing in a partner to share the huge costs. At least these have been reduced, given that the low oil price has cut the amounts oil services companies can charge, and the latest update suggests Sea Lion could eventually break even at a price of $45 a barrel.
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