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Dixons Carphone - shares fall on lower profits and weaker outlook

George Salmon | 20 June 2019 | A A A
Dixons Carphone - shares fall on lower profits and weaker outlook

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

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One-off costs and charges, particularly around the UK mobile market, mean Dixons Carphone has reported a loss of £259m.

After stripping those exceptional items out, pre-tax profit was £298m, broadly in line with group forecasts. However, investors have been told to expect another drop next year, to around £210m. That's' well behind market expectations.

The shares fell 17.5% on the news.

Following the decision to cut the dividend in December, the final payment of 4.5p per share means the full year payout is 6.75p, down from 11.25p last year.

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Our view

Just six months after taking the decision to cut the dividend, the issues facing the UK mobile business mean management are changing the policy again by scrapping plans to grow the payout from the rebased level. With debt ticking up and adjusted profits set to fall again next year, these are tough times indeed.

Mobile markets are generally tough, and those who do decide to replace or upgrade are doing so on SIM only deals. Dixons' business model was dependent on customers signing up to multi-year contracts on certain networks, and it now looks like it may face penalties for missing volume commitments.

Then there's the challenges facing the electricals business. Currys PC World may be one of the only places left where you can go and physically browse electrical goods, but the rise of online competitors brings a whole new problem.

In many cases the current economic and political uncertainty means expensive electrical kit is at risk of being rubbed off shopping lists altogether. Add in a change in mix that's increasing delivery and installation costs, and you're left with a foul-tasting concoction.

To its credit, Dixons is trying to fix itself up. Cost savings are coming in ahead of plan, the mobile business is being restructured and while losses are expected next year, management are hopeful it'll at least breakeven in 2022.

Longer-term, the strategy is to do what its online rivals can't - deliver a face-to-face service. That's probably the right way to go - a lot of customers don't mind paying more if they get a bit of help from a friendly and knowledgeable store assistant.

Unfortunately this could all be too little, too late. Wafer thin margins and retreating profits are stubborn problems, so we'll need to see proof Dixons' strategy can deliver results before we turn more positive.

The shares traded on a P/E rating of 6.2 times expected earnings before the price move on full year results, and offer a prospective yield of 6.6% next year.

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Full year results

Underlying revenue was flat on an underlying basis at £10.4bn. That came as store closures offset the impact of 1% like-for-like revenue growth.

While UK & Ireland electricals revenue rose 1% to £4.5bn, lower margins on account of a greater take-up of installation packages meant pre-tax profit fell from £231 to £180m.

The UK mobile market remains tough, with customer preference shifting rapidly towards lower margin SIM only plans. Sales were down 11% to £2bn due to a 4% drop in LFLs and store closures. Underlying profits fell from £43m to £9m, and the division is set to deliver a significant loss next year.

In the Nordics, underlying revenues rose 4% to £3.5bn with profits improving from £106 to £112m. Sales in Greece of £459m delivered profits of £21m, up from £20m last year.

Despite slightly lower capital expenditure of £166m and a lower dividend, the group's net debt position increased from £249m to £265m on account of the lower profits.

Higher transformation costs mean capital expenditure is set to rise to around £275m next year. However the group expects to hold the debt position steady due to working capital improvements.

Find out more about Dixons Carphone shares including how to invest

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.