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Dixons Carphone is a prime takeover target
Technology products and services retailer Dixons Carphone (DC.) is trading at the wrong price for a market leading company profiting from sustained strong trading.
Should this undervaluation persist, the laptops-to-smart TVs seller could even pique the interest of private equity, which prizes companies with strong cash flow such as Dixons, the company whose shares will soon go under the name of Currys.
The pandemic boosted demand for Dixons’ products and services, yet management insists the retailer’s markets will be structurally larger post-pandemic, and that not all last year’s growth was pulled forward. Increasingly confident about its prospects, Dixons should also interest income seekers again, having reinstated dividends.
On 30 June, Dixons delivered better-than-expected adjusted pre-tax profit of £156 million (2020: £116 million) for the year ended 1 May 2021 as an online sales surge offset lost revenues from Covid-enforced store closures.
Like-for-like electricals sales grew 14% despite pandemic-enforced store closures in the UK, Ireland, Norway, Denmark and Greece. Online electricals sales grew 103% to £4.7 billion, highlighting the retailer’s strengthening omni-channel position and market share gains.
Competition in online electricals is cut-throat, with rivals including Amazon and AO World (AO.), yet brick and mortar outlets act as a destination for Dixons Carphone to showcase products and help customers struggling with electrical device problems.
Covid-19 has structurally increased the size of the technology market and Dixons Carphone should prove a major beneficiary of hybrid working, which will translate into more electronics usage and faster replacement needs.
The company says the new financial year has seen ‘continued strong trading in all our markets’, and management is ‘more confident than ever’ in Dixons’ prospects.
A 3p per share full year dividend has been proposed, which is expected to grow in future years supported by the strong free cash flow that has returned the company to a net cash balance sheet.
For the year to April 2022, Liberum forecasts £153 million pre-tax profit ahead of £237 million in 2023.
Based on estimated 2023 earnings of 15.4p and a forecast dividend of 6p, Dixons trades on 8.4 times earnings and investors are being offered a 4.7% yield while they wait for the shares to rerate.
Boasting a strong brand in Currys, Dixons’ operating margins are improving as strong sales combine with restructuring-led cost savings and the turnaround of its UK and Ireland mobile business is on track.
Besides rerating scope, Dixons Carphone also offers upside in the form of a potential takeover bid, most likely from a private equity buyer keen to accelerate growth and push the Currys brand even harder.