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Dixons Carphone: 'Continued strong momentum'

George Salmon | 29 June 2016 | A A A
Dixons Carphone: 'Continued strong momentum'

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Dixons Carphone have this morning released their full year results. After releasing Q4 figures last month, there are few surprises. The shares were down 1.5-2% this morning.

On an underlying basis, revenues increased 3%, while reported revenues were held back by Sterling's strength over the year, and was broadly flat at £9,738 million. Profit before tax increased by over 17% to £447m.

Growth was assisted by the delivery of synergy benefits related to the merger and a strong operating performance in the UK & Ireland. UK like-for-like (LFL) revenues rose 6%. Store closures, as the combined estate was rationalised, held overall revenue growth down to just 1%, but UK profits before interest and tax increased 20% to £365m.

The Nordic and Southern European regions saw increasing LFL sales, despite challenging economic conditions. Earnings before interest and tax in the Nordics fell 8% to £79m as prices were cut, costs increased and the Norwegian Krone devalued. Southern Europe Headline earnings before interest and tax rose 13% to £17 million.

The group propose a final dividend of 6.50p, taking total dividends for the year up 15%, to 9.75p.

The group have signed new deals with EE to provide mobile phone insurance, and with TalkTalk to support the sale and distribution of mobile, TV and broadband connectivity. In the US, the joint venture with Sprint is to see a major rollout with Dixons expecting to earn $40-50m p.a. from their share by FY 2019/20.

Outlook:

The UK store estate is set to reduce by a further 134 stores as the merger proceeds, with the 3-in-1 model coming into all stores during this financial year. The effect on this year's profit is expected to be neutral due to increased costs, this year, with the gains kicking in from next year onwards.

Seb James, CEO said that volatility regarding the decision to leave the EU is 'inevitable', he believes that as the strongest player in their market, the group can expect to find opportunities for additional growth and consolidate its position as UK market leader.

Our view:

Despite economic conditions being far from favourable in many areas, market share is increasing in key categories and like-for-like sales are heading in the right direction across the board.

However, the vote to leave the EU has knocked the shares, which is perhaps unsurprising given the group's exposure to the UK consumer. This shows that not everyone shares Mr James' stance that the Brexit vote will provide further opportunities to the group. The structural threat posed by online retailers like Amazon and eBay is also a concern. The online players have structural cost advantages, such as lower rent, staff and Business Rate burdens.

Looking ahead on a 'glass half full' basis, investors will note the potential savings to be had from integrating PC World, Currys and Carphone Warehouse stores into the 3-in-1 model, where synergies are currently ahead of schedule. With the number of internet-enabled devices per household set to rise, demand for what the group sells should grow, and following the closure of Phones4U and Comet, Dixons Carphone now stands alone as a large-scale electrical specialist with a bricks-and-mortar presence.

Early indications are that the joint venture in the US with Sprint, a big American network, looks to be emulating the earlier success with Best Buy Mobile, another US joint venture that made big returns for Carphone Warehouse a few years ago.

Given their position as the 'last man standing' and the prospects of the US venture, the group look to be well placed. Current expectations are for earnings growth to average around 10% over the next two years. To meet or exceed these expectations, and keep customers coming through the doors, the main challenge will be to cope with the threat of Amazon et al. We feel that the key factor will be the service and knowledge of the sales staff, as this is one area where the group holds a potential trump card in its battle against the online retailers.

At present, the shares trade on a forward PE of 10.5x, having dropped significantly below their historic average of around 16x.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.