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Broker tips: DCC, Shell

By Iain Gilbert

Date: Wednesday 15 May 2024

Broker tips: DCC, Shell

(Sharecast News) - RBC Capital Markets lifted its price target on DCC on Wednesday to 5,800.0p from 5,700.0p after the group published its full-year results a day earlier.
The Canadian bank said the results were in line, with underlying earnings of £683.0m versus its forecast of £687.0m, and trends largely as expected.

"We have tweaked numbers due to the incremental M&A and lower tax rate guidance partly offset by higher interest and forex," it said. "2025E EPS moves up circa 1% as a result."

RBC also said it has reworked its sum of the parts, hence the price target increase but kept the shares at 'sector perform', saying it believes that DCC needs to stabilise its return on capital employed if a valid argument for multiple expansion is to be made.

"Whilst headline multiples remain undemanding, we think overall valuation will be somewhat limited by the conglomerate nature of the group, along with the fact that, despite the well-communicated Energy strategy, there remains some uncertainty on the pace of the transition and whether DCC can maintain the pace of M&A to get to its 2030 target," RBC said. "In addition, the fact that ROCE has continued to fall (from 17.1% in 2021 to 14.3% today) hasn't helped the argument for multiple expansion."

Analysts at Berenberg raised their target price on energy giant Shell from 2,950.0p to 3,400.0p on Wednesday, stating the group was "still on the right track".

Berenberg noted that Shell reported "a strong set of Q1 results" on 2 May, demonstrating the progress that the company was making on its strategy under a new management team, with better operational performance, combined with a focus on cost and capital discipline, driving strong earnings and cash flow.

"Its integrated gas business delivered another strong quarter, helped by lower operating costs, higher volumes and solid trading results. Cash flow before working capital was $16.1bn, the highest since Q3 2022, enabling another $3.5bn buyback and a $2bn reduction in net debt alongside a $2.8bn working capital build," pointed out the German bank, which reiterated its 'buy' rating on the stock.

Berenberg stated that despite the strong performance so far this year, the valuation remains attractive, in its view, with a 12% free cash flow yield underpinning the anticipated 10% total cash return to shareholders, with the stock trading on 8.8x price-to-earnings ratio.


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