Fitch Ratings has affirmed DCC plc's Long-Term Issuer Default Rating (IDR) at 'BBB'.
The Outlook is Stable. Fitch has also affirmed DCC Group Finance (Ireland) Designated Activity Company's senior unsecured instrument ratings at 'BBB'.
DCC plc's IDR reflects its scale, leading market positions and diversification across its three business segments (energy, healthcare and technology) with positive underlying demand drivers, and credit metrics that are in line with an investment-grade financial profile. A prudent financial policy and healthy free cash flow (FCF) allow DCC to continue its M&A-driven growth strategy without affecting its credit metrics. This is balanced against low margins, typical of the distribution sector in which the company mainly operates, and execution risk in its energy-transition strategy.
The Stable Outlook is driven by a strong liquidity position, our view that overall M&A integration risks should be manageable, and related outflows will remain within the boundaries of DCC's financial policy.
Key Rating Drivers
Large Conglomerate: DCC is a large distribution conglomerate with around GBP20 billion revenues in FY24 (year-end March). Energy accounted for 74% of adjusted operating profit, followed by healthcare and technology at 13% each. All its three segments have good underlying demand drivers supporting organic growth.
Sound Geographic Diversification: DCC also has good geographic diversification, albeit with some concentration in the UK and Ireland (36%), where it has a leading market position in off-grid energy, supplies to GPs and hospitals, health and beauty contract manufacturing, and technology distribution. This is complemented by a market presence in North America and continental Europe, with leading positions in liquefied petroleum gas (LPG) in France and Germany.
Adequate Leverage and Interest Cover: We expect net EBITDA leverage to modestly increase towards 2.0x by FY28 from 1.4x in FY24 as DCC will use some of its large cash balances to fund M&As. This is adequate for the 'BBB' rating category, and in line with the company's financial policy of net debt/EBITDA (before IFRS 16) below 2.0x. We also anticipate strong EBITDA interest coverage, at over 7.0x and in line with an investment-grade rating.
Continued EBITDA Growth: We forecast EBITDA to reach GBP1 billion by FY26-FY27 from a Fitch-defined GBP785million in FY24. This would be driven by low-to-mid single-digit organic growth, complemented by acquisitions, in combination with a growing share of services, renewables and other businesses (within energy). Profitability should gradually increase in the energy business and slightly improve in technology (operating profit margin from 1.9% in FY24) and healthcare (from 10.3%).
Execution Risk in Energy Transition: Fitch believes DCC should be able to capitalise on its leading market positions in off-grid energy in the UK and LPG distribution in France, in combination with acquiring renewable capabilities to mitigate execution risk in its energy transition strategy. DCC is replacing slowly declining volumes in traditional fuels (19% of energy operating profits in FY24) with expanding profits from energy services and renewables (35% in FY24) by widening its offer and supporting its customers to transition to bio-fuels such as HVO or self-generating energy from non-fuel sources. DCC will also be increasing its revenues from solar installations and from a recurring energy management service business.
Commercial/Industrial Ahead in Energy Transition: We expect DCC to benefit mostly from its core commercial and industrial channel (45% of energy gross profits in FY24), where customer demand for greener energy is driven by self-imposed carbon emission reduction targets. These should transition ahead of domestic customers (34%). However, we do not expect a negative impact on DCC's revenues from the UK's delay in banning both gas boilers and the sales of petrol and diesel cars, as DCC will also continue selling its higher-carbon fuels to those customers.
Low-Margin Business: DCC, being a distributor, generates a fairly low 4% EBITDA margin. Profitability in its energy distribution is commonly measured on a pence per litre basis, which can result in fluctuations in the EBIT margin. We expect an increase in overall energy segment profits per litre as services contribute more to profits by FY28. DCC's profitability is also constrained by low margins in technology.
Organic Growth Returning in H&B: We expect healthcare revenues to return to organic growth from FY25, after two years of decline. Its health & beauty segment (H&B) resumed growth in 2HFY24, after destocking drove healthcare revenue 2.2% lower in FY23. The acquisition of Medi Globe added around GBP100 million pro-forma revenue (about 15%) to healthcare in FY23. Healthcare generates the highest operating margin within the group, at 10%-13% over the last five years.
Margin Improvement in Technology: The technology segment, in particular Info Tech - DCC's low-margin technology distribution business accounting for about half of the unit's revenue - suffered from weaker demand for consumer products in Europe in FY23-FY24. We expect a gradual recovery with like-for-like sales growth from FY26. We forecast cost measures will contribute to a gradual operating margin improvement up to FY28 as volumes recover on product replacement cycles following larger spend on technology during the pandemic, and on increased innovation.
Strong, Positive FCF Conversion: We expect continued positive FCF generation of around GBP170 million-GBP240 million annually, with margins near 1%, despite higher interest cost as gross debt increases and a progressive dividend policy.
Highly Acquisitive: We forecast continued disciplined M&As in valuation multiples, size and integration risk. We project around GBP400 million spend annually across DCC's all three segments, in line with its strategy to double their operating profits, while reducing profits from traditional and lower-carbon products to 25%-30% by FY30 from nearly 50% in FY23. We estimate that DCC has completed or agreed about half of our assumed annual acquisition spend for FY25 as of July 2024.
Acquisitions in FY25 include GBP90 million spent on Next Energy, which enhances DCC's energy transition capabilities in the domestic sector in the UK. DCC has a proven record of integrating acquired businesses and effectively managing a multitude of businesses.
Derivation Summary
We have applied the Generic Ratings Navigator to assess DCC, a conglomerate distributor with operations across energy, healthcare and technology.
For the energy business, the closest Fitch-rated peers are Puma Energy Holdings Pte. Ltd (BB/Stable), Vivo Energy Ltd. (BBB-/Stable) and UGI International, LLC (BB+/Stable), the leading LPG distributor in Europe. DCC is larger by revenue and profits from its energy segment than the three peers. It is more focused on developed markets and has a more diversified product portfolio with a more balanced exposure between fuel, low carbon and renewables.
Vivo and Puma are fuel retailers exposed to emerging markets, which offer good associated growth but are also in more volatile operating environments. DCC's profit margin is below UGI's (forecast EBITDA margin at 13%), but similar to Vivo's and above Puma's. DCC's stronger financial profile is underpinned by its lower financial leverage, reflecting a more conservative financial policy and greater financial flexibility. Vivo's IDR benefits from a one-notch uplift for support from its stronger parent.
For healthcare we compare DCC against Cardinal Health, Inc. (BBB/Positive) and Cencora, Inc (previously AmerisourceBergen; A-/Stable). The two peers are materially larger, with revenues over USD200 billion, stable operating profiles that benefit from steady pharmaceutical demand and oligopolistic positions within the drug distribution industry. DCC generates higher EBITA margin within its healthcare division (10%) than both peers (around 1%). DCC has higher leverage than the two peers.
For technology we compare DCC against Avnet, Inc (BBB-/Stable), the largest distributor of electronic components globally, and Arrow Electronics, Inc (BBB-/Stable), a semiconductor distributor. Both peers are larger, each with revenues above USD25 billion, than DCC's technology segment (GBP4.7 billion), and have higher EBIT margins (4%-5% versus DCC's adjusted technology EBITA margin of near 2%). FCF can fluctuate for the peers depending on working-capital movements but it is typically positive for DCC. Their leverage profiles are similar, while DCC's financial policy is 0.5x-1.0x more conservative than the two technology peers'.
We also compare DCC with Bunzl plc, a distributor of healthcare, safety, cleaning and hygiene, grocery, foodservice and retail products. DCC is larger by revenue but its operating margin is lower at around 3%-4% compared with Bunzl's 7%-8%. Both groups have a record of strong earnings growth, generate positive FCF and spend on M&A. Both have similar leverage, with DCC having a 0.5x more prudent financial policy than Bunzl, which had access to more available liquidity at FYE23.
Key Assumptions
Fitch's Key Assumptions within our Rating Case for the Issuer:
Overall revenue to decline by low single digits in FY25 on commodity price and volume declines for traditional fuels, which are partly offset by growth in services and renewables. We expect continued like-for-like revenue decline in technology and some revenue recovery in healthcare in FY25
Overall revenue to grow by mid-single digits for FY26-FY28, driven by low-to-mid single-digit organic growth and acquisitions
EBITDA margin gradually increasing towards 5% in FY26-FY27 from 4% in FYE24 and EBITDA gradually increasing to around GBP1 billion. This is driven by earnings growth from the energy segment transitioning to cleaner energy and services, and gradually improving healthcare margin
Annual working capital outflow around GBP30 million over FY25-FY28
Capex on average around GBP230 million a year during FY25-FY28
M&A spend on average of GBP420 million per year for FY25-FY28
Dividends to grow in line with earnings
No share buybacks to FY27
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Growth in size and enhanced diversification leading to earnings growth with EBITDA trending towards GBP1.5 billion
Mid-single-digit FCF margins (FY24: 1.2%)
Conservative financial policy sustaining EBITDA net leverage at below 1.5x (FY24: 1.4x)
EBITDA interest coverage above 8.0x (FY24: 7.3x)
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Inability to capture market share during energy transition, loss of market share or contracts within technology or healthcare, and/or poor cost management or inability to successfully integrate acquired businesses leading to a decline in profits
Lower cash generation with FCF margins below 0.5% on a sustained basis
EBITDA net leverage at or above 2.5x on a sustained basis
EBITDA interest coverage consistently below 6.0x
Liquidity and Debt Structure
Strong Liquidity: DCC had strong available liquidity with GBP934 million of cash (after our adjustment of GBP175 million for working capital), along with GBP765 million in an undrawn, committed revolving credit facility (RCF) at FYE24. Our rating case assumes repayment of upcoming debt maturities in FY25, refinancing of subsequent well-spread debt maturities and some additional debt for acquisitions.
Until recently all DCC's term debt was only from the US private placement market with unsecured notes maturities ranging between FY25 and FY34 and no material near-term refinancing risk. In June 2024, DCC entered the public capital markets by issuing EUR500 million seven-year unsecured notes under its new EUR3 billion EMTN programme, which has broadened its access to funding and diversified borrowings. The proceeds were used to refinance most of the GBP369 million debt maturing in FY25.
Around 45% of debt is at floating rates. Its GBP800 million RCF matures in March 2029. It is used during the year to manage debt maturities and fund acquisitions, along with receivables discounting used for its technology business.
Issuer Profile
DCC plc is a distribution conglomerate anchored in energy and also operating across healthcare and technology sectors in over 20 countries.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
DCC PLC 
