ii view: Currys bullish on profits after bid talks end

Trading update following terminated takeover interests

Chief Executive Alex Baldock commented:

“Stronger trading, selling more of the solutions and services that boost margins and build customers for life, and strong cost discipline have all been important.

“Thank you to all my colleagues who are making this possible - you're building an ever-stronger Currys that helps everyone enjoy amazing technology"

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ii round-up:

Electrical goods retailer Currys (LSE:CURY) today upped its full-year profit forecast given stronger-than-expected trading since its key Christmas trading period ended in early January. 

Annual adjusted pre-tax profit is now expected to be at least £115 million, up from a previous forecast of between £105 million and £115 million. The raised guidance follows recently abandoned takeover interest from both US private equity firm Elliot Advisors and Chinese retailer JD.com.

Shares in the FTSE 250 company rose 3% in UK trading having fallen by 12% the week before as takeover hopes faded. Currys shares are up by close to a fifth year-to-date, comfortably outperforming gains of less than 1% for both the FTSE 250 index itself and online-only electrical retailer AO World (LSE:AO.).

Currys trades across 815 stores and several websites in eight countries including the UK. The previously agreed sale of its Kotsovolos business in Greece is expected to complete in the first half of April, leaving it finishing the financial year in a net cash position - up from net debt of £97 million a year ago.

Management continues to pursue a recovery for its Nordics business following previous overstocking and then heavy price discounting from competitors, as well as keeping encouraging momentum going for its UK and Irish business. 

All other full-year guidance remained unchanged including expected capital expenditure of around £70 million and required staff pension contributions of £36 million. 

A full-year trading update is due on 14 May. 

ii view:

Formerly Dixons Carphone, Currys brand names today include Mobile iD in the UK and Ireland and Elkjøp in the Nordics. Employing around 28,000 people, its operations include product repair facilities in Newark in the UK, a product sourcing office in Hong Kong, and a wide distribution network for both home and store deliveries. The UK & Ireland generate its biggest slug of sales at around 53%, followed by the Nordics and including Norway, Sweden, Denmark, and Finland at 40% and Greece 7%. 

For investors, elevated borrowing costs continue to weigh on consumer spending, with slow housing market transactions also likely hindering sales of white goods such as washing machines and ovens. The sale of its Greek business reduces geographical diversity, competitors such as John Lewis are not standing still, while the dividend remains suspended given a focus on strengthening the balance sheet.  

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On the upside, previous takeover interest suggests at least a perception of value in the Currys business. The profit margin for its challenged Nordic business has improved, and product sales advice is available to consumers in contrast to rivals such as Amazon. A high focus on costs persists, while a move into net cash is likely to raise hopes for a return to a dividend payment at some point. 

For now, more cautious investors are likely to await evidence of higher profit before adding to existing shareholdings. But things become interesting if the company does improve group profit margin, while a consensus analyst fair value estimate at over 67p also appears to offer grounds for longer-term optimism.

Positives

• Focus on costs
• Diverse product/services and geographical footprint

Negatives

• Tough economic backdrop
• Halted dividend payment

The average rating of stock market analysts:

Hold