We don’t believe specialist electrical and telecoms retail business Dixons Carphone (DC.) will stay in the doldrums for long.

The shares have been hit by a combination of an August 2017 profit warning, signs of fragile consumer confidence and a squeeze on discretionary big ticket spend.

Nevertheless, we think the risk versus reward ratio has improved post half year results on 13 December. Chief executive Sebastian James announced plans to revive the UK mobile business and flagged strong festive sales momentum.

The £2.2bn cap is best known for its Carphone Warehouse and Currys PC World brands, though it also provides an array of business-to-business (B2B) services.

Competitive strengths include enviable electricals and mobile market shares, a leading specialist multi-channel position and deep supplier relationships, which hold the key to clinching market share across the UK and Ireland, Nordics and Greece.

Admittedly, half year results showed a slump in pre-tax profit to £61m (2016: £154m), struck after £58m of UK & Ireland write-downs. There was also a downgrade to the top end of full year pre-tax profit guidance, narrowed to a £360m-to-£400m range, although free cash flow was significantly improved to £169m (2016: £64m).

More encouragingly, Dixons Carphone highlighted market share gains across consumer electronics and white goods and a record Black Friday in all geographies. Cyber weekend best sellers included large TVs, headphones and smart tech products.

James believes ‘we can, over time, reduce the complexity and capital intensity of our mobile business model, and increase the simplicity and profitability of what we do’, potentially implying store closures. Actions to improve profitability while retaining market dominance offer a positive New Year catalyst for the shares.

Carphone Warehouse faces rising competition and handset prices as well as changing customer habits. First-half like-for-like UK & Ireland mobile sales fell 3%, impacted by the delayed launch of
the iPhone X and consumers holding on to handsets for longer.

Numis forecasts a sharp drop in pre-tax profit to £370m (2017: £489m) for the year to April 2018, ahead of a small recovery to £375m in 2019.

Dixons now trades on a low price-to-earnings ratio of 7.6 times with a generous 6% yield. We think the bad news is more than priced in and just meeting these conservative estimates could provide a catalyst for the shares to move much higher in 2018.

If they stay low for too long, we wouldn’t be surprised to see the company become a takeover target. (JC)

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