Investec retail stock analyst’s note: Dixons Carphone may benefit from Phones 4U administration – buy

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Retail Times has teamed up with Investec to publish analysts’ notes on leading retail stocks. Today, Investec Securities analyst, Alistair Davies, suggests Phones 4U’s administration is opportunity for Dixons Carphone and recommends “buy”

Phones 4U’s loss of its EE contract left the business with none of the UK network carriers and the business is to be placed into administration. Although no news has yet been announced on EE’s review of its agreement with Carphone Warehouse, for Dixons Carphone there could be an opportunity to capture market share in the medium term as customers roll off two-year agreements and switch from P4U to other retailers (either directly or via an independent). Buy recommendation retained.

  • News overnight of Phones 4U going into administration follows the loss of its EE contract as part of EE’s strategic review which left the business with none of the big three networks
  • No news has been announced on EE’s agreement with Carphone Warehouse (which currently has all three networks in its stores), but the troubles at Phones 4U should act as a boost for CPW via market share gains
  • For context, P4U had 11% market share with c. £1.1bn of revenues, and EBIT of £100m+. CPW has 19% of the UK market. Theoretically, if we assume a transfer of P4U’s market share based on existing share in the UK market, for Dixons Carphone this could allow for £225m of revenue upside (c. 6% for CPW / 2% at a group level)
  • Applying a similar gross margin as for CPW (25%) and a small element of incremental costs relating to the revenue upside, this could represent a £45m opportunity for forecasts (FY15E: £337m PBT, FY16E: £408m PBT and 21.3p / 26.3p EPS respectively). We note this may be more back-end weighted.
  • Valuation: on our current forecasts, Dixons Carphone shares trade on c.15x CY15E EPS vs. sector on c. 14x, assuming just £80m of synergies – a number we feel is underpinned with scope for upside. We believe the strong cash generation of the business also offers upside from cash returns to shareholders, given 3x earnings cover / 7-8% FCF yield