Goldman Upgrade 17014 Jan 2020 13:06
Goldman Sachs likes Dixons Carphone,
We upgrade Dixons Carphone (DC) to Buy from Neutral and raise our DCF derived price target to 170p from 130p: (1) we expect 2H20 (April-2020 year end) to see an inflection in DC’s UK electrical segment profitability, and expect the segment to deliver consistent mid-single-digit earnings growth in FY21/22, driven by internal initiatives; (2) FY21E should see significant transformation of DC’s UK mobile segment, enabling it to move from a loss of £90 mn in FY20E to a £5 mn profit by FY23E. We assume DC will close the large majority of its standalone Carphone stores in the UK, and benefit from c.£100 mn of cost savings over the next two years; and (3) reduction in trade receivables (up to £500 mn) should fund increased capital expenditure and help reduce financial leverage (from 0.6x net debt/EBITDA in FY20E to net cash of c.£80mn in FY23E). We expect DC to deliver an EPS CAGR (FY20-22E) of 22% as a result of the above.
We currently forecast only +1% LFL growth for DC in FY21E in its UK electrical segment, and a steep decline in the mobile segment. However, we believe tailwinds from events such as Euro 2020 and the Olympics, increasing adoption of 5G phones, and improving consumer confidence over big-ticket purchases pose upside risks. DC will report its 3Q FY20 trading on January 21: we expect UK electrical LFL of -1% (on a comp of +2%). However, our more positive view and rating upgrade are a function of improved prospects for medium-term earnings/cash growth.
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