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Dixons Carphone - Shares fall 30% on profit warning

Nicholas Hyett | 24 August 2017 | A A A
Dixons Carphone - Shares fall 30% on profit warning

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Dixons Carphone plc Ordinary 0.1p

Sell: 122.60 | Buy: 122.80 | Change 0.10 (0.08%)
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Shares in Dixons Carphone fell 30% in early trading, after the group issued an unscheduled trading update.

Tough conditions in the UK mobile phone market, negative revaluation of receivables, and a new charging structure for honeybee software mean Carphone Warehouse now expects profit before tax for this year to be in the range of £360m-£440m (2016: £501m).

Our View

Dixons Carphone's new profit guidance may be around 20% lower than previous market expectations - but things aren't quite as bad as first glance would suggest.

The £10m-£40m revaluation of renewables is both one-off and non-cash, it's an unpleasant surprise but shouldn't have long-term consequences. Moving to a subscription based charging method for the honeybee software package will have more of an impact, but revenues should still turn-up, just later. Moving away from an upfront sales model should mean performance in the CWS division is smoother and there won't be repeats of the 24% fall in revenues we saw in the first quarter.

However, news that UK consumers are hanging on to their phones for longer is more concerning. Currency movements will have made new phones more expensive, but since the same should be true in the electronics business, which is faring well, we suspect the lack of significant innovation in recent models is a bigger problem.

Unfortunately that's not something Carphone Warehouse can do a great deal about. The forthcoming generation of Samsung Galaxy and iPhone handsets claim to make big steps forward, but recent history hasn't delivered much that's revolutionary. CEO Seb James will be hoping Apple's Tim Cook has something big up his sleeve with the iPhone 8.

Added to those short-term headwinds is the long-term pressure from online competitors who have cost advantages such as lower business rates, fewer staff, and cheaper rent. This often translates to lower price tags, and taking on the likes of Amazon and eBay is no easy task.

Long term, Dixons Carphone's strength lies in the fact that it's the last man standing on the High Street. There are still plenty out there who like to try before they buy, and don't mind paying a touch more if they get a bit of help from a friendly and knowledgeable store assistant. If Dixons' in-store service is sufficient to keep customers coming in, and leaving happy, this could prove its trump card.

However, these are challenging times for the group, reflected in the fact that the shares were already trading at 6.9 times expected earnings before today's announcement. Back in mid-2015, 17x was the going rate. Prior to today's announcement the shares offered a prospective yield of 4.9%.

Trading Update Details

Trading conditions in the UK & Irish, Nordic and Greek electrical businesses are said to remain good. Group like-for-like revenues continue to grow, up 6%, and saw improvements across all regions, up 4% in the UK & Ireland, 8% in the Nordics and 6% in Greece.

However the Connected World Services business, which provides software and services to third party phone and electrical retailers, saw reported revenues decline 24%. That reflects the non-recurrence of the significant Sprint contract sold last year, and also the move towards providing honeybee software on a subscription basis rather than through upfront sales. As a result the division is expected to generate limited profits this year.

In the UK a combination of higher handset costs, following currency fluctuations, and a lack of technical innovation means that consumer are replacing their handsets less frequently. This has had a negative impact on Carphone Warehouse's sales. Although the group expect this trend to reverse in the long run, it has decided to invest in pricing and proposition to maintain market share and scale. Increased investment will hit profitability in the division this year.

Finally, the group expects to have to make negative adjustments to the value of money it is owed relating to roaming charges. This largely stems from changes to EU roaming charge legislation and is expected to have a negative effect of between £10m and £40m.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.