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Retail titan’s market share and resilience are significantly underrated

A near-25% share price decline in electricals and mobile phone retailer Dixons Carphone (DC.) over the past year puts the £3.8bn cap in deep value territory. That’s according to Liberum Capital which believes the shares could rebound by at least 30% over the next year to 430p.

Liberum says the Carphone Warehouse-to-Currys PC World brand owner is its ‘favourite value play’.

Dixons Carphone is considered to be a long-term structural winner, taking over 25% market share in its core retail geographies and ‘gaining share faster than any competitor’ through its leading specialist multi-channel position and deep supplier relationships.

Formed through 2014’s merger of Dixons Retail and Carphone Warehouse, Dixons Carphone is a far more defensive business than before the financial crisis, says Liberum.

International market shares are bigger, the multi-channel offering is superior and the enlarged group is more competitive on price, not forgetting higher mobile exposure.

Liberum reckons shareholders are getting Dixons Carphone’s service operations almost for free, if peer group valuations are applied to its core retail business.

The broker says the core retail arm should be valued at an enterprise value (EV) of £4.3bn. This compares to a current group EV of £4.5bn; forecast net debt and pension liabilities of £269m and £474m respectively plus the market cap.

This means the market is attributing scant value to the growing service division, which consists of ‘KnowHow’ and Connected World Services (CWS), Dixon’s business-to-business operations including software platform honeybee and the US Sprint joint venture store roll-out. Liberum sees ‘strong potential upside’ to come from CWS, in particular.

Full year results on 28 June offer a potential re-rating catalyst, should the announcement provide greater visibility on the CWS operations.

Ahead of the numbers, Liberum forecasts pre-tax profit of £486m (2016: £447m), earnings of 31.5p (2016: 28.4p) and a dividend hike from 9.8p to 10.6p.

We see merit in the broker’s bullish analysis, although risks include the scope for falling big ticket electrical sales as inflation rises and household budgets are squeezed.

There’s also the threat of more intense competition and the risk mobile operators expand their own store networks.

Dixons Carphone is a structural retail winner and we’re buyers at 328.9p. A prospective PE ratio of 10.4 discounts too much Brexit-related doom and gloom.

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