Dixons Carphone cheap but 'uninspiring'

It was the warning that 2017 will be another year of uncertainty that caused Dixons Carphone's share price to slump, as investors ignored its 20% profit growth in the first half.

Two years after the tie-up of household names Dixons and Carphone Warehouse, the group looks better positioned than some; but, with exceptional costs still high, the valuation might not be compelling just yet.

Headline pre-tax profit surged 19% to £144 million in the 26 weeks to 29 October, boosted by its acquisitions of Simplifydigital and InfoCare and by synergies from its Dixons/Carphone tie-up continuing to feed through. Operating profit fell short of expectations, so a smaller interest charge likely gave earnings a nice boost.

Basic earnings per share (EPS) jumped from 7.5p to 10.9p. Including further merger integration costs and charges relating to its property three-in-one rationalisation programme, statutory pre-tax profit reached £104 million.

With group sales up 4% to £4.9 billion, the bulk of this is from the UK & Ireland business, although 3% revenue growth to £2.99 billion was constrained by store closures - Simplifydigital went some way to offset this.

To create the "store estate of the future", the group has been rolling out its three-in-one store concept since the beginning of the year - each store holding the three PC World, Currys and Carphone Warehouse brands within it. From next year earnings should be boosted by £30 million.

With stable free cash flow of £65 million and management slashing nearly £100 million from its debt pile, the group's able to give the interim dividend an 8% boost to 3.5p.

"While we have still not seen any effect on consumer demand as a consequence of Brexit, we have been planning for the possibility of more uncertain times ahead," chief executive Seb James warns.

The group has prioritised reducing its fixed cost base and finding areas to grow its market share in case this demand starts to unwind. It's also working to ensure customers "won't get a better deal" elsewhere in the face of currency headwinds next year.

Share price collapse

Weighed down by concerns that the weak pound will hit costs and demand next year, Dixons Carphone's share price has collapsed by over 30% since the beginning of the year.

It has recovered somewhat from its post-Brexit plunge to a three-year low of around 240p, although a negative trading channel on the chart is exerting enough pressure to keep the market value depressed. The shares slipped 5% to 348p Tuesday.

"We think the medium-term trading outlook is more favourable than for the other sector majors, backed by technology advances, the group's market position and potential to develop new profit sources in the consultancy field," explains analyst Matthew Taylor.

The shares look "slightly cheap" on a PE multiple of 11 times 2017 earnings"However, forecast momentum has stalled recently and cash flow continues to be impaired by various exceptional cost items, while the valuation on a broader set of measurements is not yet compelling in our view."

A new tie-up with SSE will mean 5 million of the energy company’s customers have the ability to control their homes and appliances through Dixon Carphone's honeyBee software.

The Connected World Services division is gathering momentum, with revenue up 46% to £98 million in the period, while operating profit rose £2 million to £5 million.

And, with Black Friday trading solid, Numis has maintained its outlook for the year, pencilling in sales of £10.7 billion, pre-tax profit of £482.5 million and EPS of 30.5p. A dividend of 10.8p gives the shares a 3% yield.

Taylor reckons the shares look "slightly cheap" with a price/earnings (PE) multiple of 11 times 2017 earnings, but "uninspiring" with a 3% free cash flow yield.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.