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Dixons Carphone - mobile still struggling but group on track

Nicholas Hyett | 12 December 2019 | A A A
Dixons Carphone - mobile still struggling but group on track

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Dixons Carphone plc Ordinary 0.1p

Sell: 113.10 | Buy: 113.40 | Change -0.80 (-0.69%)
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Extra costs associated with the challenging UK mobile market, including the strategic change programmes, meant Dixons reported a pre-tax loss at the half year of £86m. Without these costs, pre-tax profit was £24m.

The group still expects adjusted pre-tax profit of around £210m for the full year.

An interim dividend of 2.25p was announced, and the shares rose 1.6% following the announcement.

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Our view

The Mobile industry has changed. People upgrade less, and many prefer SIM only contracts. That's been a problem for Dixons.

Its 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. Those troubles resulted in management taking the decision to cut the dividend, and there are no plans to grow the payout from the rebased level.

Then there are 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.

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 management are hopeful it'll at least break even 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.

In particular, there's an ongoing push to make stores more of a destination, setting up "experience zones" where customers can play with the latest gadgets. On paper that makes sense, and could set tills ringing with more vigour.

But thin margins and retreating profits are stubborn problems. Dixons has done a lot of heavy lifting, and there is potential - but the work is far from over. Overall, we'll need to see proof Dixons' strategy can deliver results before we turn more positive.

The shares trade on a P/E rating of 8.4 times expected earnings, and offer a prospective yield of 5.1%.

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Half year results (constant exchange rates)

Group revenue declined 3% to £4.7bn at constant currency. That reflects an overall drop of 1% in repeat business, and continued difficulties in mobile.

UK & Ireland electricals revenue reached £2bn, which reflects a 1% decline, and flat like-for-likes (LFL). Bigger-ticket items like domestic appliances and game consoles didn't do as well as hair & beauty and headphones products. Gross margins were lower as the group discounted its prices, and adjusted operating profit was down 26% to £31m.

As expected, Mobile sales were weaker. Revenue fell 18% to £830m, while like-for-like sales were down 10%. Dixons has raised its provision for compensation relating to previously mis-sold policies by £30m to £35m, and adjusted operating losses were £49m, compared to £21m last year.

In the Nordics division, revenue rose 3% to £1.7bn, with performance in Finland particularly strong, although margins were mildly impacted as some sales moved online. Adjusted operating profits rose 10% to £47m. Revenue in Greece was up 8% to £227m.

Higher IT costs meant capital expenditure rose £14m to £98m, and net debt - not including lease liabilities - was £290m.

Looking ahead, Dixons expects full year net debt to be down year-on-year, though haven't given guidance on the size of the reduction. It expects capital expenditure of around £200m, which has been reduced from previous expectations of £275m.

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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 disclosure for more information.