1 December 2016 Europe/United Kingdom Equity Research Specialty Hardline
Dixons Carphone Plc (DC.L) Rating OUTPERFORM Price (29 Nov 16, p) 335.40 INITIATION Target price (p) 420.00 Market Cap (£ m) 3,864.7 Enterprise value (£ m) 4,147.0 Standing tall – initiate at Outperform *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ■ Initiating with an Outperform rating and a target price of 420p. Despite ¹Target price is for 12 months. robust LFL growth and profit delivery this year, shares are down 33% year to Research Analysts date on investor concerns about weak sterling and demand next year. We Pradeep Pratti, CFA argue that Dixons Carphone will pass through higher costs, while demand is 44 207 888 5043 likely to remain stable and the flux in the industry should help the company [email protected] gain market share in the UK and Europe. With additional benefits from Simon Irwin planned synergies, the ongoing store optimisation and focus on Services, we 44 20 7888 0320 [email protected] estimate the group can deliver 3-4% top-line growth, +60bps EBIT margin and strong cash generation over the next four years. On 10.5x 12-month P/E, we think the shares are discounting no growth and a 4% terminal margin; we view this as overly pessimistic. ■ Consolidation still playing out. The electricals retail sector is still right- sizing, and our analysis of key UK independent retailers highlights the sub- scale nature of the many operators and the likelihood of further consolidation. Europe is in flux with the Darty-FNAC merger this year and the upcoming separation of Metro's consumer electronics business which we believe can benefit Dixons Carphone. ■ Services strategy to drive growth. We also think Connected World Services, which now has a few material contracts under its belt (including the Sprint joint venture in the US), and B2C services, can drive more than one- third of EBIT growth to 2020E. ■ Catalysts and Risks. We expect 1H results (14 December) to highlight strength in electricals demand. We forecast 7% UK/Ireland like-for-like sales and £138m PBT (+14% Y/Y). Key risks include the UK macro outlook, further sterling weakness and increased competition from pure-play operators. ■ Valuation. We derive our 12-month target price of 420p using equally- weighted discounted cash flow (5.0% terminal EBIT margin and 8.5% weighted average cost of capital) and multiples-based (11.5x 12-month P/E) methodologies. We expect 7-8% 4-year EPS CAGR and 3% dividend yield to support a share-price recovery. Share price performance Financial and valuation metrics
5 0 0 Year 4/16A 4/17E 4/18E 4/19E Revenue (£ m) 9,738.0 10,319.5 10,541.3 10,848.3 4 0 0 EBITDA (£ m) 645.0 691.8 723.9 760.1 Pre-tax profit adjusted (£ m) 447.00 487.37 515.03 550.76 3 0 0 CS EPS (adj.) (p) 28.37 30.98 32.74 35.45 2 0 0 Prev. EPS (p) Jan - 1 5 Ju l- 1 5 Jan - 1 6 Ju l- 1 6 ROIC (%) 11.3 11.4 11.6 12.1 P/E (adj.) (x) 11.8 10.8 10.2 9.5 D C.L FT SE A LL SH A RE IN D EX P/E rel. (%) 73.6 64.3 72.2 74.0 The price relative chart measures performance against the EV/EBITDA (x) 6.4 6.0 5.6 5.1
FTSE ALL SHARE INDEX which closed at 3686.8 on Dividend (04/17E, £) 10.61 Net debt/equity (04/17E,%) 9.3 29/11/16 Dividend yield (04/17E,%) 3.2 Net debt (04/17E, £ m) 282.2 On 29/11/16 the spot exchange rate was £.85/Eu 1.- BV/share (04/17E, £) 2.7 IC (04/17E, £ m) 3,330.0 Eu.94/US$1 Free float (%) 81.4 EV/IC (04/17E, (x) 1.2 Performance 1M 3M 12M Source: Company data, Thomson Reuters, Credit Suisse estimates Absolute (%) 6.6 -11.1 -31.2 Relative (%) 8.7 -11.1 -36.1
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 1 December 2016
Dixons Carphone Plc (DC.L) Price (29 Nov 2016): 335.40p; Rating: OUTPERFORM; Target Price: 420.00p; Analyst: Pradeep Pratti Income statement (£ m) 4/16A 4/17E 4/18E 4/19E Company Background Revenue 9,738 10,320 10,541 10,848 Dixons Carphone is Europe's leading specialist electricals and EBITDA 645 692 724 760 telecommunications retailer with presence in 11 countries. Depr. & amort. (177) (184) (193) (197) EBIT 468 507 531 563 Blue/Grey Sky Scenario Net interest exp. (21) (20) (16) (12) Associates (4) 0 5 15 PBT 447 487 515 551 Income taxes (110) (122) (129) (138) Profit after tax 337 366 386 413 Minorities - - - - Preferred dividends - - - - Associates & other 0 0 0 0 Net profit 337 366 386 413 Other NPAT adjustments (176) (53) (30) (30) Reported net income 161 313 356 383 Cash flow (£ m) 4/16A 4/17E 4/18E 4/19E EBIT 468 507 531 563 Net interest (21) (20) (16) (12) Cash taxes paid (56) (104) (119) (128) Change in working capital (97) (96) (26) 3 Other cash and non-cash items 100 98 125 114 Cash flow from operations 394 386 495 541 CAPEX (221) (243) (215) (205) Free cashflow to the firm 330 309 417 460 Acquisitions (50) 0 0 0 Divestments 24 0 0 0 Other investment/(outflows) (9) (15) (17) 0 Cash flow from investments (256) (258) (232) (205) Net share issue/(repurchase) (5) 0 0 (50) Our Blue Sky Scenario (p) 560.00 Dividends paid (106) (125) (135) (146) Our Blue Sky scenario assumes robust demand in the industry in Issuance (retirement) of debt 25 0 (50) (50) 2017, coupled with a strong pass-through of higher prices and a Cashflow from financing (117) (145) (201) (258) sustained improvement in EBIT margins. We model 2017 sales Changes in net cash/debt (9) (17) 112 128 +5%, assume a 6% terminal EBIT margin in our DCF, which is +110bps higher than our forecast margin for 2016/17E and also a Net debt at start 256 265 282 170 terminal growth rate that is 1% higher. In our peer multiples, we Change in net debt 9 17 (112) (128) assume the retail sector re-rates back to c.14x 12m PER. Net debt at end 265 282 170 42 Balance sheet (£ m) 4/16A 4/17E 4/18E 4/19E Our Grey Sky Scenario (p) 290.00 Assets Our Grey Sky Scenario assumes a sharp shock to electricals and Total current assets 2,322 2,500 2,632 2,779 mobile demand in the UK and overall sales 5% lower Y/Y. We also Total assets 6,929 7,215 7,408 7,591 assume margin pressures due to higher product costs as a result of Liabilities weak sterling. In our DCF we model terminal margin of 4%, 90bps Total current liabilities 2,491 2,604 2,656 2,728 lower than our base case forecast for 2016/17E and no terminal Total liabilities 4,069 4,167 4,139 4,135 growth. Also we assume the overall retail sector derates further and Total equity and liabilities 6,929 7,215 7,408 7,591 use an 8x earnings multiple in our peer valuation. Per share 4/16A 4/17E 4/18E 4/19E No. of shares (wtd avg.) (mn) 1,188 1,180 1,180 1,165 Share price performance CS EPS (adj.) (p) 28.37 30.98 32.74 35.45 Prev. EPS (p) 500 Dividend (p) 9.75 10.61 11.47 12.49 Free cash flow per share (p) 27.78 26.22 35.36 39.51 Key ratios and valuation 4/16A 4/17E 4/18E 4/19E 400 Growth/Margin (%) Sales growth (%) 18.0 6.0 2.1 2.9 300 EBIT growth (%) 17.0 8.4 4.7 6.0 Net income growth (%) 18.2 8.5 5.7 6.9 200 EPS growth (%) (1.2) 9.2 5.7 8.3 EBITDA margin (%) 6.6 6.7 6.9 7.0 Jan- 15 Jul- 15 Jan- 16 Jul- 16 EBIT margin (%) 4.8 4.9 5.0 5.2 Pretax profit margin (%) 4.6 4.7 4.9 5.1 DC.L FTSE ALL SHARE INDEX Net income margin (%) 3.5 3.5 3.7 3.8 Valuation 4/16A 4/17E 4/18E 4/19E The price relative chart measures performance against the FTSE ALL SHARE EV/Sales (x) 0.4 0.4 0.4 0.4 INDEX which closed at 3686.8 on 29/11/16 EV/EBITDA (x) 6.4 6.0 5.6 5.1 On 29/11/16 the spot exchange rate was £.85/Eu 1.- Eu.94/US$1 EV/EBIT (x) 8.8 8.2 7.6 6.9 Dividend yield (%) 2.91 3.16 3.42 3.72 P/E (x) 11.8 10.8 10.2 9.5 Credit ratios (%) 4/16A 4/17E 4/18E 4/19E Net debt/equity (%) 9.3 9.3 5.2 1.2 Net debt to EBITDA (x) 0.4 0.4 0.2 0.1 Interest coverage ratio (x) 22.3 25.4 33.2 46.9 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates
Dixons Carphone Plc (DC.L)2 1 December 2016
Key charts
Figure 1: UK/Ireland is two-thirds of group sales… Figure 2: … and three-quarters of headline EBIT
Nordics 2017E 19% 2017E Nordics £3.0bn CWS 3%
Group sales Group EBIT £10.3bn £507mn CWS UK & Ireland Southern £0.2bn £6.5bn Europe 4% UK & Ireland 74%
Southern Europe £0.7bn
Source: Credit Suisse estimates Source: Credit Suisse estimates
Figure 3: Electrical retailing still consolidating Figure 4: Group EBIT, margins forecast to grow
700 5.6% Marketshare of top-5 retailers 90% Denmark 600 5.4% Finland 5.2% 80% 500 Germany 5.0% Greece 400 70% 4.8% Ireland 300 4.6% 60% Netherlands 200 Norway 4.4% Spain 50% 100 4.2% Sweden - 4.0% 40% UK 2017E 2018E 2019E 2020E 2010 2011 2012 2013 2014 2015 UK & Ireland Europe CWS EBIT margin (rhs)
Source: Euromonitor, Credit Suisse Research Source: Credit Suisse estimates
Figure 5: 12m FWD P/E is at a multi-year low Figure 6: Expect balance sheet to strengthen
20 300 3.5 18 3.0 16 200 14 2.5
12 2.0 10 100 1.5 8 1.0 6 -
4 0.5 2 -100 0.0 0 2014 2015 2016 2017E 2018E 2019E 2020E Nov-06 Nov-08 Nov-10 Nov-12 Nov-14 Nov-16 DC Fwd PE average +1 SD -1 SD Net Debt (£m) Lease adj. net debt / EBITDAR
Source: DataStream Source: Company data, Credit Suisse estimates
Dixons Carphone Plc (DC.L)3 1 December 2016
Table of contents
Standing tall – initiate at Outperform 1
Key charts 3
Executive summary 5
Valuation 7
Credit Suisse HOLT® 9
A merger that worked 11
A slimmer country portfolio 13
Strength in core retail businesses 17
Nordics 36
Services and CWS 37
Financials 40
Credit Suisse PEERs 47
Dixons Carphone Plc (DC.L)4 1 December 2016
Executive summary We are initiating coverage on Dixons Carphone with an Outperform rating and a 12-month target price of 420p, implying a 1-year total shareholder return of 30%. We view Dixons Carphone as a rare example of a successful retail merger. In the slightly over two years since the combination of Dixons Retail and Carphone Warehouse, the group has gained significant market share in its core markets and demonstrated robust operating and best-in-class profitability metrics in what is widely considered to be one of the toughest sub-sectors in retail – consumer electricals retailing. The core business is stronger and well-positioned. The core business today is geographically more focused after exiting retail operations in seven European countries. The business has adapted well and continues to adjust its model to the rapid shift to online retailing with the current UK store closure program. We think the market is overly pessimistic on cost pass-through and the demand environment. We believe electrical retailers will pass through higher input prices brought about by weak sterling and largely preserve margins; we see parallels in European peers – Media Saturn, FNAC and Darty – that saw relatively stable gross margins last year when the € weakened c.15% vs. the US$ Y/Y. We also do not expect a sharp deterioration next year in the demand environment which has remained robust post the UK referendum. We see room for further share gains in UK. Supermarkets and independents still control c.30% of the UK electricals market. Supermarkets continue to shrink non-food space and our analysis of key independent retailers' highlights the fragmented nature of this segment and the potential market share opportunity. In aggregate we assume that Dixons Carphone, John Lewis and the pure-play retailers (Amazon, AO) will continue to take ~2-3 percentage points of market share each year at the expense of supermarkets and independents. Europe could present opportunities. Europe is in flux with the Darty-FNAC merger this year and the upcoming separation of Metro's consumer electronics business. We think this can benefit Dixons Carphone and present opportunities to optimize its Southern European portfolio and potentially add to its market-leading shares in Sweden/Greece. The services businesses are just taking off. The group is laying the foundations for growth in higher-margin B2C/B2B services and consulting franchises. We think the focus on Connected World Services (CWS), which now has material contracts under its belt, and the B2C services/KnowHow business where the group is currently punching below its weight in the UK, will be drivers of medium-term earnings growth. We think CWS based on the Sprint JV alone will contribute to a third of EBIT growth through 2020. Earnings growth is underpinned by cost initiatives. We are confident the group can deliver +60bps EBIT margin and strong cash generation over the next few years, helped by additional benefits from planned synergies and the ongoing store-closure program. We also expect further store optimisation, especially in the Nordics and in the Carphone estate, to drive incremental cost savings in the coming years. Cash generation is set to improve. Post the peak capex this year, we expect improving cash generation to underpin dividend growth and also leave the prospect for additional cash return to shareholders (we model £50m in buybacks p.a. starting in two years). Management team is well regarded. Most of the senior executives from both of the merged businesses are still with the group two years on. We think this speaks to the strength and depth of the management team and their commitment to the business. Valuation looks compelling. For a business with market-leading positions in core markets, best-in-class profit margins, a 7-8% 4-yr EPS CAGR forecast, 3% dividend yield and an improving balance sheet, the shares are trading on a multi-year low 10.5x 12-
Dixons Carphone Plc (DC.L)5 1 December 2016
month forward P/E, down 33% YTD (vs -18% for UK general retail), and seem to discount a no sales growth and 4% terminal margin scenario. We think the stock's de-rating is overdone and we see the current share price as an attractive entry point. Interims on 14 December: Electricals and mobile demand was strong in the quarter according to BRC. Comps are also easier in UK/Ireland into 2Q and we expect some LFL benefit from sales transfer from closed stores (~2ppt). In terms of profitability, there is the ongoing contribution from synergy benefit from the merger that should be fully realised this year. We forecast 7% UK/Ireland LFL and £138m of group PBT for the half. Risks In our view, the key risks to this business are: ■ UK macro risks: A weak UK economy next year driven by the uncertainties around the UK's relationship with Europe could dampen demand for electricals and slow the upgrade cycle. A weaker housing market could also soften demand in the (major domestic appliances (MDA) market. ■ Sterling weakness: Sterling depreciation this year means a higher cost of product purchased as most of what the group buys is manufactured overseas. If the company is unable to pass on the higher prices to customers, margins are likely to shrink. However, this could also have the effect of driving further consolidation in the market and possibly some capacity withdrawal, which could benefit Dixons Carphone. ■ Tougher competition: It is possible that competitors could operate on much lower margins or even losses for longer, putting further pressure on industry margins. Also, pure-play operators (such as AO) could take a higher share of the market as they expand into categories such as computing. ■ Nordic margins: These have been soft over the last couple of years due to competition, price investments and weak macro (especially in Norway). A recovery in these margins could take longer. ■ Less product innovation: On the mobile side of the business, it is already the case that the incremental innovation and features in newer devices are becoming marginal, leading customers to delay upgrades. It is possible that upgrade cycles could lengthen across more categories, leading to softening demand conditions. ■ Network dependencies: The group has long-term contracts with network operators. Any termination of MNO agreements would affect revenues in the mobile business. ■ Deal flow in CWS could be slow: While Dixons Carphone already has an impressive roster of clients in its CWS business, it is possible that new deals could be slow to come by, particularly given the lengthy nature of the sales cycle.
Figure 7: Dixons Carphone - investment summary Positives Risks Catalysts (next 6 months) ○ Successful merger, synergies on target ○ Less clear macro and demand outlook ○ Interim results (14 December) ○ Right sized country footprint for next year ○ Xmas trading (24 January) ○ Well-regarded management team ○ Sterling weakness should result in ○ Market leading positions in UK/Ireland, higher prices Dixons Nordics and Greece and scope for gains ○ Online competition still strong Carphone ○ Scale with suppliers and manufacturers ○ Already at industry leading margins ○ Growth initiatives in Services and CWS ○ CWS deal flow could be slow ○ Dividend supported and FCF improving ○ M&A risk ○ Valuation not demanding
Source: Credit Suisse research
Dixons Carphone Plc (DC.L)6 1 December 2016
Valuation We use equal weightings in our valuation framework for DCF and peer multiples. Our 12- month target price of 420p is derived from the fair values of DCF and peer-multiples based valuations. Our target price gives us a 1-year expected total return of 30%. DCF assumptions: Our DCF takes a very conservative 5.0% terminal EBIT margin, broadly similar to the current margin, and assumes that higher margins from services (CWS, etc.) will offset any potential margin pressures in the core retail businesses. We also use an 8.5% WACC. This gives us a 12-month DCF-derived valuation of 451p.
Figure 8: DCF Valuation (£m) Year to 30 April 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E TV Sales 9738 10320 10541 10848 11166 11449 11696 11903 12068 12189 Growth (%) 6.0% 2.1% 2.9% 2.9% 2.5% 2.2% 1.8% 1.4% 1.0% EBIT 468 507 531 563 601 607 612 613 613 609 EBIT margin 4.8% 4.9% 5.0% 5.2% 5.4% 5.3% 5.2% 5.2% 5.1% 5.0% Tax Rate 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% NOPAT 353 381 398 422 451 456 459 460 459 457 Depreciation & Amortization 177 184 193 197 202 200 197 193 188 183 As a % of sales 1.8% 1.8% 1.8% 1.8% 1.8% 1.7% 1.7% 1.6% 1.6% 1.5% Change in working capital -14 -96 -26 3 3 0 0 0 0 0 As a % of sales -0.1% -0.9% -0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Operating Cashflow 516 469 565 623 656 655 656 653 648 640 Capital Expenditure -221 -243 -215 -205 -205 -203 -199 -195 -189 -183 As a % of sales 2.3% 2.4% 2.0% 1.9% 1.8% 1.8% 1.7% 1.6% 1.6% 1.5%
Free cash flow 295 226 350 418 450 453 456 458 459 457 Growth (%) -23.2% 54.6% 19.3% 7.9% 0.5% 0.8% 0.4% 0.0% -0.3% Discount 1.00 0.92 0.85 0.78 0.72 0.67 0.61 0.56 0.52 PV of cashflows 226 323 355 353 327 304 281 259 238
Terminal growth rate 1.0% SENSITIVITY ANALYSIS PV of cashflows 2,427 PV terminal value 3,173 Termnial EBIT Margin Total EV 5,600 451 3.0% 4.0% 5.0% 6.0% 7.0% Net debt (282) 6.5% 429 533 637 741 845 Minorities 7.5% 362 446 529 613 697 Pensions (438) WACC 8.5% 313 382 451 520 588 Fair value of equity 4,880 9.5% 276 333 391 449 506 Number of shares 11.8 10.5% 246 295 344 393 442 Equity value per share (p) 414 12m forward target price (p) 451
Discount rate Perpetual growth Gross debt 489.0 451 -1.0% 0.0% 1.0% 2.0% 3.0% Market cap. 4,035.4 6.5% 513 565 637 740 902 D / (E + D) 10.8% WACC 7.5% 444 481 529 596 691 Pre-tax cost of debt 4.0% 8.5% 389 416 451 496 558 Unlevered beta 1.0 9.5% 345 366 391 423 465 Levered beta 1.00 10.5% 309 325 344 368 397 Risk-free rate 1.5% Market risk premium 7.5% Cost of equity 9.0% WACC 8.5% Source: Company data, Credit Suisse estimates
Dixons Carphone Plc (DC.L)7 1 December 2016
Peer Multiples: We look at both consumer electronics peers and the UK general retail sector: global consumer electronics peers broadly trade on a 12-13x 12-month forward P/E ratio while Dixons Carphone trades on 10.5x 12m forward earnings. In the UK, the general retail peer group has de-rated this year and also trades on similar 12-month forward earnings multiple (12-13x). In our valuation multiple assumptions for Dixons Carphone, we assume the stock should re-rate modestly and trade on 11.5x 12-month forward PER. This is a very conservative assumption given that the group's margins are higher than electrical retail peers and also highlights the potential upside should the broader UK retail sector re-rate.
Figure 9: Electricals – Peer multiples Share Price Market Cap PE EV/Sales EV/EBITDA EV/EBIT CCY Lcy £m CY16 CY17 CY16 CY17 CY16 CY17 CY16 CY17 Electrical retailiers Dixons Carphone Plc GBp 332 3,826 11.1x 10.5x 0.4x 0.4x 6.2x 5.8x 8.2x 7.6x Best Buy USD 47 11,869 14.4x 13.5x 0.3x 0.3x 5.9x 5.7x 8.2x 8.0x AO World GBp 165 695 nm 267.9x 1.2x 1.0x nm 64.4x nm 79.9x J Sainsbury GBp 236 5,161 11.3x 11.7x 0.3x 0.3x 5.2x 4.8x 9.9x 9.4x Groupe Fnac EUR 68 1,520 19.0x 13.2x 0.4x 0.3x 8.5x 5.6x 15.7x 8.3x METRO AG EUR 28 7,733 15.3x 13.3x 0.2x 0.2x 4.8x 4.5x 8.1x 7.5x Via Varejo BRL 9 915 nm 26.2x 0.1x 0.1x 3.0x 3.0x 4.6x 4.3x Cnova N.V. USD 5.5 1,935 nm nm 0.7x 0.6x nm 75.4x nm nm Median 14.4x 13.3x 0.4x 0.3x 5.6x 5.7x 8.2x 8.0x Mean 14.2x 12.5x 0.3x 0.3x 5.6x 4.9x 9.1x 7.5x UK general retailers in our coverage B&M GBp 250 2,503 18.3x 15.4x 1.2x 1.1x 12.8x 11.2x 14.3x 12.6x Kingfisher GBp 358 8,488 14.3x 12.6x 0.7x 0.7x 8.0x 7.8x 10.9x 10.9x Marks & Spencer GBp 336 5,534 11.3x 12.7x 0.7x 0.7x 5.7x 6.1x 10.5x 11.7x Next GBp 4950 7,519 11.4x 11.7x 2.0x 2.0x 8.9x 9.3x 10.0x 10.5x Median 12.8x 12.7x 1.0x 0.9x 8.4x 8.5x 10.7x 11.3x Mean 13.8x 13.1x 1.2x 1.1x 8.8x 8.6x 11.4x 11.4x Source: Datastream, Credit Suisse estimates (for Dixons Carphone)
Blue Sky/Grey Sky Scenarios: Grey Sky Scenario: Here we assume a sharp shock to electricals and mobile demand next year in the UK (overall sales -5% Y/Y). We model margin pressures assuming the sector is unable to pass through higher product purchasing costs as a result of weak sterling. In our DCF we pencil in terminal margin of 4%, 90bps lower than our base case forecast for 16/17E and no terminal growth. Also we assume the overall retail sector de-rates further and use an 8x 12M forward earnings multiple in our peer valuation. Blue Sky Scenario: This scenario assumes robust demand in the industry next year, coupled with a strong pass-through of higher prices and a sustained improvement in EBIT margins. This model assumes +5% sales next year vs our base case, a 6% terminal EBIT margin in our DCF, which is +110bps higher than our forecast margin for 2016/17E and also a terminal growth rate that is 1% higher. In our peer multiples, we assume the retail sector re-rates back to c.14x 12m PER.
Figure 10: Summary valuation table TP Method Current 12m FWD Grey Sky 12m FWD Blue Sky 12m FWD DCF (5% terminal margin) 414 451 Margin, TGR -100bps 330 Margin, TGR +100bps 620 PER (11x 12m FWD PE) 366 392 PER (8x 12m FWD PE) 259 PER (14x 12m FWD PE) 501 Valuation (p) 390 420 290 560
Source: Credit Suisse estimates
Dixons Carphone Plc (DC.L)8 1 December 2016
Credit Suisse HOLT® The HOLT methodology uses a proprietary performance measure known as Cash Flow Return on Investment (CFROI®). This is an approximation of the economic return, or an estimate of the average real internal rate of return, earned by a firm on the portfolio of projects that constitute its operating assets. A firm's CFROI can be directly compared against its real cost of capital (the investors' real discount rate) to see if the firm is creating economic wealth. By removing accounting and inflation distortions, the CFROI allows for global comparability across sectors, regions and time, and is also a more comprehensive metric than the traditional ROIC and ROE. Credit Suisse forecasts linked to HOLT Since the 2014 merger, Dixons Carphone has generated double digit CFROI in line with the median return for the UK Retail space. Using our forecasts in the HOLT model indicates 14% valuation upside: a warranted value of 377p/share compared to our target price of 420p/share. This is driven by improvements in both margins and asset turns as expressed in Figure 11 below. Our model uses a 10-year forecast window to account for the level of CFROI achieved since the merger. We note that the default HOLT discount rate of 6.20% for Dixons Carphone is driven by significant Operating Lease debt which results from HOLT capitalizing all operating leases. Putting this into perspective, the market-implied discount rate for the UK is currently at 4.76% and a company-specific 144bps of credit risk differential is added by HOLT. In contrast, our traditional DCF utilises a nominal WACC of 8.5%; with an inflation adjustment we calculate a real discount rate of 5.5%. Utilising this discount rate suggests a warranted value in HOLT of 444p, which is very close to our DCF valuation.
Dixons Carphone Plc (DC.L)9 1 December 2016
Figure 11: Dixons Carphone HOLT Linker summary
Source: Credit Suisse HOLT
Dixons Carphone Plc (DC.L) 10 1 December 2016
A merger that worked Management teams largely intact and expertise retained We think an important and perhaps underappreciated aspect of the Dixons Carphone investment case is that almost all of the senior executive team members from both of the merged businesses, which were already best-in-class, are still with the combined group more than two years after the transaction, a continuity in leadership not often seen in mergers. Only Nigel Langstaff, former CFO of Carphone Warehouse, has left the group. In our view, this is a reflection of how well the businesses have integrated without any major issues and it also underscores the depth and strength of the current management team, which retains the expertise and capabilities of both sides of the business.
Figure 12: Senior teams from Dixons Retail and Carphone Warehouse still with the business
Dixons Retail Carphone Warehouse
John Allan (Chairman) Charles Dunstone (Chairman) Sebastian James (CEO) Roger Taylor (Deputy Chairman) Humphrey Singer (CFO) Andrew Harrison (CEO) Katie Bickerstaffe (UK/Ireland CEO) Nigel Langstaff (CFO) Graham Stapleton (UK/Ireland CEO)
Dixons Carphone (current)
Charles Dunstorne (Chairman) Left the business: Lord Livingston of Parkhead (Deputy Chairman) Sebastian James (CEO) John Allan (non-exec) Andrew Harrison (Deputy CEO) Roger Taylor (non-exec) Humphrey Singer (CFO) Nigel Langstaff (CW CFO) Katie Bickerstaffe (UK/Ireland CEO) Graham Stapleton (CWS CEO)
Source: Company data Delivered on sales, profits and synergies The combined Dixons Carphone business grew market share in the UK (both in electricals and mobile postpaid) as well as in the Nordics in each of the years since the merger. In UK mobile, the closure of Phones4U in 2014 was the main source of market share gains.
Figure 13: Gaining share on the Carphone side … Figure 14: … and on the Dixons side of the business
UK postpay mobile share UK electricals share
30% 26.6% 26% 25.2% 25% 25% 24.4% 19.6% 24% 20% 23.2% 16.0% 15.5% 23% 15% 22% 21.5% 10% 21% 5% 20% 0% 19% FY12/13 FY13/14 FY14/15 FY15/16 FY12/13 FY13/14 FY14/15 FY15/16
Source: Company data Source: Company data
Dixons Carphone Plc (DC.L) 11 1 December 2016
Like-for-like sales growth has been positive in the company's main markets – UK & Ireland and Nordics – for the nine quarters that the company has reported since the merger. We expect 2Q16/17 and 2H this year to post strong LFL growth as well.
Figure 15: Nine quarters of positive LFL growth set to continue 14% LFL sales growth 12%
10%
8%
6%
4%
2%
0% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17E
UK & Ireland Nordics
Source: Company data, Credit Suisse estimates
Integration work – combining head offices, warehouses etc. – was largely done and ahead of plan without any disruption to the core business. The timeline for delivery of the guided 'at least £80m' synergy benefit was advanced within six months of completion of the transaction and is to be delivered by FY16/17, a full year ahead of the initial plan. Note that this was split roughly 50/50 between incremental revenues driven by setting up the Carphone connectivity proposition into Dixons stores (shop-in-shops) and cost savings. Most of the synergy benefits delivered are reflected in the UK & Ireland margins, which have improved in each of the last three years and are currently at industry best-in-class levels. Nordics margins remained flattish in 2015 and 2016 driven by increased competition while Southern Europe also saw good margin improvement.
Figure 16: Synergy benefits reflected in UK & Ireland margin improvement Pro-forma EBIT margins 6%
4%
2%
0% UK & Ireland Nordics S Europe
FY14 FY15 FY16 FY17E
Source: Company data, Credit Suisse estimates
Dixons Carphone Plc (DC.L) 12 1 December 2016
A slimmer country portfolio A focused geographical footprint The last three years have been mostly about pruning the portfolio and exiting sub-optimal geographies (seven country exits) and businesses, mostly in the Carphone side of business in Europe. Since the merger in 2014, the group has exited businesses and retail operations that contributed roughly £0.5bn in revenues and over £100m in losses, leaving a stronger core franchise. The main exits are: ■ Sale of interest in Virgin Mobile France: This transaction led to a £104m cash inflow and along with Phone House retail closures marked the group's exit from France. ■ Sales of phone businesses in Germany, Netherlands and Portugal: These are sub-scale operations with combined revenues of £529m and losses of £129m in FY14/15. ■ Sales of Electroworld Operations in Turkey and Central Europe: These had revenues of approximately £300m (the Central Europe businesses in Czech Republic and Slovakia had £129m of revenues in the previous year and was loss-making at the PBT level while the Turkey business had £171m in revenues and £14m losses).
Figure 17: A brief history of transactions Date Transaction Notes Mar-12 Disposal of interest in Best Buy Mobile Carphone group disposed interest in Best Buy Mobile for £813m. Distribution of £813m to shareholders was made in Feb/April 2012 Mar-13 Disposal of Equanet B2B operations Disposal to Kelway (UK) Limited for £4.2m Apr-13 Closure of Phone House France Announced in 2013/14, completed during year ending May 2015. 2013 PAT -£45m Jun-13 CPW Europe Acquisition Carphone Group completed Best Buy Acquisition (the 50% of CPW Europe that it did not own) for £500m, taking ownership to 100% , consolidation of business from 26/6/2013. Oct-13 Disposal of Electroworld Turkey Sale to Bimeks, one of leading electrical retailers in Turkey. Operating losses of £9 million and PBT of £13.8 million on turnover of £170.7 million from 32 stores Dec-13 Sale of PIXmania operations Sale to mutares A.G. a German holding company. Dixons provided £59m of ring-fenced capital. retail operating losses of £31.3 million and losses before tax of £114.3 million on turnover of £397.7 million
Aug-14 Sale of Central European Operations 26 Electroworld specialist electrical retail stores in Czech Republic and Slovakia. £129m revenues, -£5.6m PBT in year to April 2014 Aug-14 Dixons Carphone Merger All-share merger of Dixons Retail and Carphone Warehouse Dec-14 Virgin Mobile France £104m cash inflow from disposal of equity interest. 2014 revenues of £346m, EBITDA £13m, EBIT £3m Apr-15 Disposal of The Phone House Deutschland Dixons Carphone receives c.3% in shares of Drillisch AG Group, with potential further deferred payments from future excess cash flows. 2015 revenues of £323m, Loss after tax: -£57m
Apr-15 Disposal of The Phone House Netherlands 83% stake sold. DC will remain minority shareholder and will further develop its CWS partnerships in Netherlands, initially through an insurance and technical support contract, with scope to expand in future. 2015 revenuea £159m, Loss after tax: -£123m Jul-15 JV with Sprint 20 store trial. Phase-2, JV with $32m investment and plan to open 500 stores
Jul-15 Disposal of Portugal operations Sold to Digital Place SA, 2015 revenue: £47m, Loss after tax: -£24m. Dixons Carphone will enter into a contract to provide insurance services to The Phone House Portugal through its Connected World Services division. Oct-15 Purchase of InfoCare c.£10m. Service and repair business in Nordics c.300 staff and cNOK 350m revenues
Mar-16 Purchase of SimplifyDigital c.£20m. Uks fastest growing multi-channel switching platform
Source: Company data, Credit Suisse Research
Dixons Carphone Plc (DC.L) 13 1 December 2016
Southern Europe is possibly non-core … The disposals over the last few years have left the business with market leadership positions in the UK, Nordics and Greece, which together account for c.95% of group sales and profits, and a sub-optimal footprint in Spain. Southern Europe – i.e. Greece and Spain – accounts for 6% of group revenues and 4% of EBIT last year, and in our view could be considered non-core given the size of the contribution to the overall group and the lack of synergies between the two markets and the rest of the group due to geography.
Figure 18: Southern Europe is 6% of group sales Figure 19: … and only 4% of headline EBIT
Nordics 2017E 19% 2017E Nordics £3.0bn CWS 3%
Group sales Group EBIT £10.3bn £507mn CWS UK & Ireland Southern £0.2bn £6.5bn Europe 4% UK & Ireland 74%
Southern Europe £0.7bn
Source: Credit Suisse estimates Source: Credit Suisse estimates
We are of the view that the company's future success lies in its ability to maintain and enhance dominant market positions in its two main regions (UK & Ireland and Nordics, which combined account for >90% of revenues) and potentially further trimming its country footprint should the opportunity arise (especially in Spain). We think management focus and capital allocation is better directed to the core markets and growth areas in services/CWS.
Figure 20: Dixons Carphone market shares by country
40% Market leadership positions 30%
20%
10%
0% UK Ireland Norway Sweden Denmark Finland Greece Spain
Source: Company data, Euromonitor, Credit Suisse estimates
Dixons Carphone Plc (DC.L) 14 1 December 2016
The Spanish business is increasingly moving towards franchise and the model is very different from the rest of the group. The stores are smaller and heavily focused on mobile and do not sell much in large electricals categories. Metro's Media-Saturn is the market leader in Spain followed by Euronics and Dixons Carphone. In terms of the sales contribution, we believe Spain is slightly bigger than Greece, so we assume c£300m in sales in Spain and £250m in Greece last year. The Spanish business is profitable, contributing almost all of the Southern Europe division's EBIT last year, while Greece was breakeven. This puts Spain's EBIT margins at around 5.5-6.0%, on our estimates, broadly in line with the UK & Ireland margins. We think this business could be worth c. £200m assuming a 12x EBIT multiple.
Figure 21: Spain moving to franchise Figure 22: Greece estate unchanged
Spain store numbers Greece store numbers 400 75
300 50 200 25 100
- - 2015 2016 2015 2016
Own Franchise Own Franchise
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research Any potential acquisitions are likely to be focused in services and in core markets Our base case view is that management will not be tempted to embark on any major retail acquisitions in continental Europe. After all, they have spent the past three years exiting these markets where operating without significant scale did not make economic sense. ■ Any retail transaction will have to reinforce market leadership and that narrows down any potential opportunities to the Nordics, Greece, UK & Ireland (although in the latter case we do not see any potential target candidates). The overlap with Metro's Media-Saturn operations (see Figure 23) also highlights areas where Dixons Carphone could be a beneficiary should Metro decide to trim its country portfolio. For example, Media-Saturn's Swedish operations appear to be loss-making (based on media reports1) and should Metro decide to exit the country, this could present an opportunity to either add up to 27 stores contributing roughly £300m in sales or take market share.
Figure 23: Store footprint of Media Saturn Germany 417 Sweden 27 Austria 48 Switzerland 27 Belgium 23 Greece 10 Italy 110 Hungary 21 Luxembourg 2 Poland 79 Netherlands 49 Russia 67 Portugal 9 Turkey 41 Spain 77 Total 1007 Source: Company data, Credit Suisse research
1 http://it24.idg.se/2.2275/1.666481/media-markt-tio-ar-forlust
Dixons Carphone Plc (DC.L) 15 1 December 2016
■ Greece is barely profitable, and while we think this is a non-core business, the business has held up pretty strongly over the last five years in the context of a market that saw sales in the electricals category fall by a quarter over the period. Greece could see further strengthening of its market position if the smaller players continue to lose share and potentially if Metro decided to reexamine its country portfolio in the coming months (note that Metro's Media Saturn has 10 stores in Greece and its market share is around half that of Dixons Carphone, according to Euromonitor). Figure 24: Greece top electronics and appliance specialist retailers Sales in €m 2011 2012 2013 2014 2015 Dixons Carphone 359 371 374 384 363 Plaisio Computers 207 190 193 201 196 Metro AG 204 198 180 181 183 Germanos SA 350 282 225 197 178 Euronics International 41 55 35 99 92 E-Square EEIG 101 85 91 82 Elektroniki SA 116 94 77 72 64 Source: Euromonitor, Credit Suisse research ■ We do not see the company returning to retail in France, Germany or the Netherlands. Metro's Media-Markt is the market leader in Germany and in the Netherlands (with 40%+ market share). France has seen market consolidation this year with the merger of Darty and FNAC to create a market-leading electrical retailer with c.€6bn of sales in the country. ■ Acquisitions so far only on the services side of the business. The only acquisitions since the merger – Simplifydigital in the UK for £20m and InfoCare in Norway for £10m – are minor in scope, but strategic, as they signal increasing focus and confidence in the service business. We believe there could be more such smaller transactions that could add new capabilities to the services side of the business. ■ More transactions such as the Sprint JV are likely in the future. However it is almost impossible to predict the timing and size of any such deals given the bespoke nature of the individual contracts and long sales cycle. ■ We think improving cash generation should leave room for M&A activity. As the company passes peak capital expenditure this year we expect the business to increasingly have sufficient liquidity to fund modest-sized deals. Could a merger with Metro's consumer electronics business be possible? Metro AG announced earlier this year the de-merger of the group and the separation of its food and consumer electronics businesses and the listing of both the entities. The supervisory boards approved the demerger in September and the listing is expected in mid-2017. Note that Metro's consumer electronics division is a €22bn sales business with 1,000+ stores in 15 markets (leadership in 9 markets) and 2.0% EBIT margin in the last reported FY, so much larger in terms of sales but less profitable than Dixons Carphone. Near-term, we think a merger is unlikely. The separation process seems well underway – according to Metro's presentation from September, the transaction and capital structure have been finalized (the consumer electronics business will keep a 10% stake in the food business) and the company is working on strategy and branding for the division and preparing for AGM approval and listing next year. There is a Capital Markets Day on 15 December which should provide more clarity on the operational metrics and financials of the consumer electronics division. Also, the proposed listed entity will own 78.4% of Media Saturn with the rest owned by its founder Eric Kellerhals who has been critical of the Metro management2 for many years, so a resolution of that front is a pre-requisite. We think there are very limited cross-border synergies between the groups given that most of electricals buying is done locally in each country.
2 https://global.handelsblatt.com/companies-markets/dispute-overshadows-metro-media-saturn-split-603186
Dixons Carphone Plc (DC.L) 16 1 December 2016
Strength in core retail businesses The retail businesses account for over 90% of revenues and operating profits at Dixons Carphone. The market share and the EBIT margin charts on pages 11 and 12 highlight the strength of these core businesses in its main market. We believe that there is further market share to be gained in both the UK and the Nordics markets, and there is further upside, albeit modest, to industry leading margins. This is a tough industry to operate in - with very low margins and an industry structure that is moving towards fewer and larger retailer in each market. Scale is extremely important, and having the right store portfolio and driving more sales out of a smaller physical footprint is critical in an increasingly multi-channel world. We think on all these metrics, Dixons Carphone ranks well ahead of its peers. The industry context Consumer electricals and telecom retailing is a fairly a mature business in the UK and in most Western European markets. While there are pockets of growth in certain categories (connected devices, wearables, fitness etc.) the longer term outlook for growth in the broader appliances, computing and mobile segments is at best muted. Euromonitor forecasts c.2% p.a. market growth in these categories over the next few years. Looking at both the UK and in various international markets, the striking thing about electrical retailing is that ongoing consolidation and space reduction as well as the shift to online are a feature in almost all markets and margins are generally very low everywhere. ■ Best in class margins are around 5-6%: Among large retailers Dixons Carphone stands out with industry leading group EBIT margins of c.5% (and close to 6% in UK) while most of the competitors in the UK as well as peers around the globe are generally operating on lower margins. There are exceptions of course, such as Via Varejo in Brazil and among smaller UK retailers BrightHouse which have higher margins but this is mainly due to the financing component of their business.
Figure 25: Industry margins are generally very low
Robust margins in a tough industry 12% FY-1 FY0 9%
6%
3%
0%
-3%
-6% Dixons Dixons Maplin Richer Best Buy Via Varejo Hughes Argos FNAC Media Saturn Darty AO World Cnova Carphone UK Carphone Electronics Sounds Electrical (inc. startup Group losses)
Source: Company data, Credit Suisse research
Dixons Carphone Plc (DC.L) 17 1 December 2016
■ Online is growing just as in other segments within retail: Online penetration is already north of c.25% in consumer electronics in some of the key Western European markets and in the US while in consumer appliances penetrations are rising and averaging around c10-15%. The UK is leading the pack in appliance retailing online with 25% of sales through the channel and is ahead of most European countries in consumer electronics online as well.
Figure 26: UK leads appliance online retailing Figure 27:UK has high share in electronics online
30 Consumer Appliance Internet Retailing Share (%) 50 Consumer Electronics Internet Retailing Share (%) 45 25 USA 40 USA France 35 France 20 Germany 30 Germany Italy Italy 15 25 Netherlands Netherlands 20 10 Spain Spain 15 Sweden Sweden 10 5 UK UK 5 0 0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015
Source: Euromonitor Source: Euromonitor
■ This is an industry characterized by deflation brought about by rapid product obsolescence, and fast technology changes. Take electricals, which can broadly be categorized into white goods, consumer electronics and computing; together they make up c.60% of Dixons Carphone. In the UK for example the deflation in this category has been running at c3% for many years now.
Figure 28: Deflation is the norm
UK Electricals Prices Y/Y 0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8% Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16
Source: BRC, Credit Suisse research
Dixons Carphone Plc (DC.L) 18 1 December 2016
■ There is ongoing strength in demand for appliances in the UK. Strong home price growth over the last few years and robust residential construction has supported demand for large appliances.
Figure 29: UK appliance category growth rates Figure 30: UK consumer electronics growth rates
7% Appliances sales Consumer electronics 2016 6% growth rates growth rates
5% 2015
4% Major Appliances 2014 3% Small Appliances
2% 2013 Portable electronics and other In-home consumer electronics 1% Computers and peripherals 2012 0% 2011 2012 2013 2014 2015 -10.0% -5.0% 0.0% 5.0% 10.0%
Source: Euromonitor Source: Euromonitor
■ Consolidations are the norm everywhere: The shift to online and the low margins have already caused a significant shake-out in many store-based retailers. Most markets have seen the exit of marginal and smaller operators and the trend is for ongoing consolidation leading to just one or two dominant retailers in each country. There has also been a pull-back from some electrical categories by non-core players such as supermarkets, department stores and traditional mail order businesses. The combined market share of the top-5 retailers in most European markets has been steadily edging up and now hovers close to 70%. The UK, until 2-3 years ago, was the least consolidated market in Western Europe and with the Dixons Carphone merger and the exit of Comet is now broadly similar to the rest of Europe. The most recent sizeable consolidation was the merger of Darty and FNAC resulting in a €7.5bn business with presence in 7 countries.
Figure 31: Combined market share of top-5 retailers has been edging higher
Market share of top-5 retailers (%) 90% Denmark Finland 80% Germany Greece 70% Ireland Netherlands 60% Norway Spain 50% Sweden UK 40% 2010 2011 2012 2013 2014 2015
Source: Euromonitor, Credit Suisse Research
Dixons Carphone Plc (DC.L) 19 1 December 2016
■ Space reduction is ongoing: In terms of the number of specialist retail outlets, most European markets have seen a reduction of around a fifth of the store estate over the last 5 years. This is based on Euromonitor data. We expect this to continue in 2016 in most markets as retailers continue to adjust to the penetration of online in the electricals categories.
Figure 32: Specialist electrical appliance retailers store base is shrinking Store numbers 2010 2011 2012 2013 2014 2015 5-yr change Denmark 1,442 1,372 1,327 1,212 1,061 1,025 -29% Finland 1,411 1,260 1,160 1,027 979 957 -32% Greece 2,085 1,861 1,741 1,549 1,547 1,507 -28% Ireland 453 421 406 405 415 405 -11% Norway 1,419 1,375 1,377 1,399 1,384 1,361 -4% Spain 10,914 10,608 9,631 9,040 8,850 8,823 -19% Sweden 1,726 1,491 1,277 1,185 1,181 1,245 -28% United Kingdom 9,521 9,470 9,295 8,687 8,507 7,954 -16% Source: Euromonitor
Mobile For Dixons Carphone, mobile is mainly the Carphone Warehouse side of the business and accounts for roughly a third of UK revenues and a smaller share of European revenues. Operating profits are higher compared to electricals. The key industry issues worth pointing out are: Smartphone sales are growing but slowly One of the very supportive trends over the last decade in mobile retailing was the increasing consumer adoption of smart phones. Smart phones are now ubiquitous and the innovation in devices and their increased capabilities also supported a very robust upgrade cycle. Higher specification networks (e.g. 4G), the falling cost of data and proliferation of content also drove higher data usage, helping increases in ARPUs (Average Revenue per User). The market now however increasingly looks mature.
Figure 33: Smart phone sales volumes growing slowly
UK mobile phone sales by volumes (million units) 30
25
20
15
10
5
0 2011 2012 2013 2014 2015 2016
Smart Phones Feature Phones
Source: Euromonitor
Dixons Carphone Plc (DC.L) 20 1 December 2016
According to Euromonitor, while smartphones volume growth averaged c.3% over the last two years, the retail value growth was only c1.5%, highlighting the declines in average selling prices.
Figure 34: … while the average selling price is falling
UK smart phone sales trends 180 12%
175 10%
170 8%
165 6%
160 4%
155 2%
150 0% 2011 2012 2013 2014 2015 2016
Average Smart Phones Unit Price, £ (LHS) Smart Phone Sales growth by Value % (RHS)
Source: Euromonitor, Credit Suisse Research
This, we believe, was driven in part by the higher share of lower to medium priced devices in the Android space as well as deflation in category.
Figure 35: Android and iOS the dominant operating systems
Smartphone sales volumes by OS (%) 100%
80%
Other 60% Windows
40% Android
iOS 20%
0% 2011 2012 2013 2014 2015 2016
Source: Euromonitor
Dixons Carphone Plc (DC.L) 21 1 December 2016
Store-based specialist retailers still account for a fifth of the distribution of mobile phones while the share of telco-operated stores has remained at c.30% over the last 5 years. The internet channel however has almost doubled in size over the period.
Figure 36: The internet is a key distribution channel for mobiles
Telco operated Internet stores retailing 32% 29%
Mixed retailers Electronics and other and appliance 14% specialist Grocery retailers retailers 18% 7%
Source: Euromonitor
Smartphone volumes increasingly dominated by replacement demand: Euromonitor's forecasts see smartphone sales volumes growing a modest 1.3% CAGR over the next 5 years which we think will be dominated by replacements given the already high penetration levels. In the UK, sterling weakness has already begun pushing up prices (Apple iPhone 7 prices announced in September for example are already £50-100 higher than the comparable iPhone 6s model launch prices) which we believe on balance will offset soft volumes and help top-line growth in mobiles.
Figure 37: Apple iPhone sales flattening Figure 38: Samsung shipments also stable
iPhone unit sales (millions) Samsung unit shipments (millions) 80. 100.
80. 60.
60. 40. 40.
20. 20.
0. 0. Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 '10 '10 '11 '11 '12 '12 '13 '13 '14 '14 '15 '15 '16 '16 '10 '10 '11 '11 '12 '12 '13 '13 '14 '14 '15 '15 '16
Source: Apple Source: IDC
Note that the replacement cycle however has slowed somewhat as newer phones do not necessarily offer enough major advances over the products from one or two years ago. According to Euromonitor, in 2016 the UK the replacement cycle for smartphones was 24 months, up from 22 in 2012. This is against a backdrop of an all-time high level of penetration of smartphones (on average each household has close to 2 smartphones). The replacement cycle is forecast to increase to 25 months next year and Euromonitor believes this could reach 27 months in a few years.
Dixons Carphone Plc (DC.L) 22 1 December 2016
Post-pay is two-thirds of the market but still growing Another trend that has helped the mobile side of the business is the ongoing shift to post- pay contracts and a shrinking of the prepay market.
Figure 39: 63.4% of UK mobile connections were post-pay at end of 2015
Mobile subscriptions by pre-pay, post-pay (millions) 100.0
80.0 34.3 33.5 39.7 35.9 42.5 60.0 44.8
40.0
55.6 58.0 48.5 52.5 20.0 39.9 43.9
- 2010 2011 2012 2013 2014 2015 Post-pay Pre-pay
Source: Ofcom
The drivers of this are: ■ regulatory cuts in mobile termination rates causing withdrawal by network operators of subsidies on prepay phones ■ mobile operators also have made post-pay contracts and tariffs more attractive to customers than pre-paid ■ increased smartphone usage also helps as post-pay contracts allow consumers to spread the cost of paying for smartphones over the duration of the contracts ■ higher data usage (4G and content driven) also is a factor as it is expensive to use significant amounts of data on pre-pay contracts. Note that in 2015 the total UK mobile data usage was +64% higher than in 2014 (source: Ofcom report). Postpay contracts are much more valuable – over the lifetime of a contract, they could be worth 3-4x on average compared to a prepay contract for retailers and for network operators. At the recent Strategy Day, Dixons Carphone said that 68% of all connections this year are postpay reflecting the trend seen in the Ofcom data. Postpay is now over two-thirds of the market and is likely to keep edging higher, although the pace of shift from pre-pay to post-pay might begin to slow somewhat.
Figure 40: Dixons Carphone share of UK post-pay market FY12/13 FY13/14 FY14/15 FY15/16 UK postpay mobile share 15.5% 16.0% 19.6% 26.6% Source: Company data
Dixons Carphone Plc (DC.L) 23 1 December 2016
4G rollout still has legs Only around half of mobile connections are on 4G and this share is likely to keep going higher as consumers upgrade contracts and 4G coverage improves. Figure 41: 4G penetration only at c.45% of all subscriptions at end of last year
45 UK 4G mobile trends 50% 40 45%
35 40% 35% 30 30% 25 25% 20 39.5 34.5 20% 15 30.8 27.0 15% 23.6 10 19.1 10% 15.8 12.9 5 5% 1.3 2.7 0 0% 3Q 13 4Q 13 1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15
4G subscriptions (million) 4G share of all subscriptions (%)
Source: Ofcom MVNO is doing well Dixons Carphone launched an MVNO last year called iD, which utilizes the Three network's infrastructure to provide lower cost and flexible tariffs aimed mainly at the part of the market that is not addressed by the main networks. Since the launch customer growth has been very strong and the company believes it is taking share from other MVNO competitors such as Tesco mobile, Sainsbury mobile (which is now closed) and giffgaff adding to the group's share of the post-pay mobile market in the UK. Network Operator's store numbers have remained flat A risk to the Carphone Warehouse business has always been whether network operators decide to rely less on third-party distribution and focus on opening more stores and reach customers directly through their own channels. Networks in the past have pulled out of Carphone (e.g. Vodafone and Three) but have come back to doing business with the group given its significant share of new customer sign-ups and distribution network. We also think that total store numbers operated by the networks have not changed much in recent years and believe that Carphone Warehouse will continue to be a key distribution channel for the four networks in the UK.
Figure 42: Strong iD customer growth Figure 43: Network stores in UK*
450 iD customer numbers ('000) 800 Retail Store Numbers in UK 400 400 700 335 350 600
300 500 250 250 400 200 300 150 200 100 100 50 0 0 Carphone EE Vodafone O2 Three Jan 2016 April 2016 Oct 2016 Warehouse
Source: Company data Source: Company websites, Credit Suisse research (*these are approximate figures)
Dixons Carphone Plc (DC.L) 24 1 December 2016
Higher costs will likely be passed through The key investor concern in electricals and in other parts of retailing is by how much weak sterling will drive prices higher next year. A word on sourcing The starting point in our view is to recognise that most of Dixons Carphone's sourcing is through brands and distributors in the UK in sterling, and we believe only c.10% of the product is sourced directly in the US$ and Chinese yuan from Asia and that too predominantly in private label geared towards opening price points. Of the product sourced in sterling, we believe three-quarters is linked to the US$ and indirectly to Asian currencies, mainly the yuan – this would be virtually all of computing as well as mobile hardware (c.40% of sales we estimate), the majority of SDA categories (c.20% of sales), and over half of the MDA category (a fifth of sales) – with the rest euro linked. Although the £ is c.15% weaker vs. both the US$ and € Y/Y, note that the Chinese yuan has also depreciated vs. the US$, so the net £/Yuan move is close to a 10% weakness Y/Y; as a result, there is clearly some mitigation here.
Figure 44: Key FX movements Group fiscal quarter EUR/£ US$/£ CY/£ 3Q15 1.289 1.534 9.534 4Q15 1.377 1.517 9.438 1Q16 1.398 1.558 9.739 Y/Y Movement 2Q16 1.385 1.528 9.719 EUR/£ US$/£ CY/£ 3Q16 1.348 1.468 9.566 -4.6% 4.3% -0.3% 4Q16 1.279 1.435 9.337 7.1% 5.4% 1.1% 1Q17 1.203 1.343 8.927 14.0% 13.8% 8.3% 2Q17 1.148 1.263 8.525 17.1% 17.3% 12.3% 3Q17 1.174 1.241 8.615 12.9% 15.4% 9.9% 4Q17 1.174 1.241 8.615 8.2% 13.5% 7.7% 1Q18 1.174 1.241 8.615 2.4% 7.6% 3.5% 2Q18 1.174 1.241 8.615 -2.3% 1.7% -1.0% Source: DataStream
Currency weakness does not necessarily imply gross margin pressure A case in point is the € in 2015 which was on average 15-17% weaker vs. the US$ and the yuan compared to the previous year. Over this period, among European electricals retailers both Metro's Media Saturn business and FNAC saw broadly stable margins while Darty saw a modest gross margin decline. There was no margin collapse. − Metro's Media Saturn does not disclose gross margins, but EBITDA margins (adj. for special items) were slightly lower Y/Y (c.20bps) during the period of weak €. − At FNAC, gross margins were broadly flat during 1H15 compared to the previous year and were up in 2H; the company cited 'increased collaboration with suppliers' as one of the reasons for margin stability. − Darty saw its gross margins decline by c.2ppt during the period, although most of it was due an accounting adjustment. Excluding the adjustment, gross margin was down 50bps and the company highlighted 'promotional market conditions' and a 'dilutive impact from lower gross margin franchise business' as reasons. To us, these data points suggest that electricals retailers can operate though periods of FX volatility with little gross margin impact and retailers are usually able to pass through the higher purchasing costs as well as get better terms from suppliers.
Dixons Carphone Plc (DC.L) 25 1 December 2016
Figure 45: Margins of European peers during 2014-2015 Media Saturn (year end Sept) 1H14 2H14 1H15 2H15 1H16 Revenues 11,482 9,499 12,035 9,702 12,148 EBITDA before special Items 405 210 488 197 467 EBITDA margin 3.5% 2.2% 4.1% 2.0% 3.8% FNAC (year end Dec) 1H14 2H14 1H15 2H15 1H16 Revenues 1,639 2,256 1,628 2,248 1,620 Gross Profit 489 655 484 662 482 Gross margin 29.8% 29.0% 29.7% 29.5% 29.7% DARTY (year end April) 2H14 1H15 2H15 1H16 2H16 Revenues 1,816 1,644 1,868 1,665 1,992 Gross Profit 593 533 582 506 578 Gross margin 32.6% 32.4% 31.2% 30.4% 29.0% Source: Company data, Thomson Reuters
There are already signs UK prices are going up AO World said last week that "sterling softening during the year is likely to put some pricing pressure" and a recent article3 in the Telegraph quoted AO's CEO as suggesting that prices would rise 4-6%. A pricing overview4 published on the electricals comparison website Kagoo earlier this month points out that UK electrical prices are already up 8% on average since the referendum. In summary we think manufacturers will put up prices and this will reflect in higher recommended retail prices; we believe most retailers will likely pass through the higher product costs and preserve already low margins. Given Dixons Carphone's scale (quarter of the UK market share) we expect the company to be able to negotiate relatively better terms with suppliers vs. smaller peers. It is worth noting that Dixons Carphone is the only brand friendly large retail distributor with a significant store footprint left in the UK, so brands increasingly rely on the company to showcase its products. We think that in a category that has seen persistent deflation over the years (c-3% on average over the last 5 years and much higher in certain categories) it is perhaps easier to pass on some price increases compared to other sectors in retail such as in apparel. The range of prices in each of the electricals categories is usually very broad, and there will likely be some down-trading within each product category should the overall price architecture shift noticeably higher. The constant change in the technology and specifications of products in electricals also means that customers may be less likely to notice all the price increases. They are perhaps more 'visible' in certain categories such as Apple products given the high price points and the relatively narrower range (Apple has already put up prices in UK), but in most other categories we think mid-single-digit price increases could be pushed through. Thoughts on the demand environment into next year On the demand picture for the next year we look at how overall electrical appliance sales in the UK have moved with consumer confidence and disposable incomes in recent years. Largely, the overall sales of electrical appliances in the UK has tracked both the consumer confidence index (see Figure 46) and the Y/Y growth in Asda disposable income (Figure 49). Consumer confidence recovered somewhat after the sharp decline immediately post the referendum and there has been some stability in electricals sales since then (although they are still slightly lower Y/Y). Rising house prices, especially over the last three years, also we think have contributed to the demand, especially in the MDA categories.
3 http://www.telegraph.co.uk/business/2016/11/12/no-january-bargains-as-electrical-stores-plan-new-year-price-hik/ 4 http://kagoo.co.uk/brexit-price-increases
Dixons Carphone Plc (DC.L) 26 1 December 2016
Figure 46: UK appliance sales vs. cons. confidence Figure 47: … and vs. property transactions
10% 10 25% 50.0%
5% 5 20% 40.0% 15% 30.0% 0% 0 10% 20.0% -5% -5 5% 10.0% -10% -10 0% 0.0%
-15% -15 -5% -10.0% -10% -20.0% -20% -20 -15% -30.0% -25% -25 -20% -40.0% -30% -30 -25% -50.0% 9 0 1 2 3 4 5 6 9 0 1 2 3 4 5 6 9 0 1 2 3 4 5 6 9 0 1 2 3 4 5 6 9 0 1 2 3 4 5 6 9 0 1 2 3 4 5 6 0 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 ------y y y y y y y y y y y y y y y y p p p p p p p p n n n n n n n n p p p p p p p p n n n n n n n n a a a a a a a a a a a a a a a a a a a a a a a a e e e e e e e e a a a a a a a a e e e e e e e e J J J J J J J J J J J J J J J J S S S S S S S S S S S S S S S S M M M M M M M M M M M M M M M M
Electrical Appliances Retail Sales UK Consumer Confidence (RHS) Electrical Appliances Retail Sales UK # of property transactions (Y/Y)
Source: DataStream, Credit Suisse Research Source: DataStream, Credit Suisse Research
Figure 48: Asda weekly Discretionary Income (£) Figure 49: Appliance sales vs. discretionary income
220 25% 15% 20% 10% 200 15% 10% 5% 180 5% 0% 0% 160 -5% -5% -10% 140 -15% -10% -20% 120 -25% -15% 9 0 1 2 3 4 5 6 9 0 1 2 3 4 5 6 9 0 1 2 3 4 5 6 0 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 ------y y y y y y y y p p p p p p p p 100 n n n n n n n n a a a a a a a a a a a a a a a a e e e e e e e e 9 0 1 2 3 4 5 6 9 0 1 2 3 4 5 6 9 0 1 2 3 4 5 6 J J J J J J J J S S S S S S S S M M M M M M M M 0 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 ------y y y y y y y y p p p p p p p p n n n n n n n n a a a a a a a a a a a a a a a a e e e e e e e e Electrical Appliances Retail Sales Asda Discretionary Income Y/Y (RHS) J J J J J J J J S S S S S S S S M M M M M M M M
Source: Asda Income Tracker, Credit Suisse Research Source: Asda Income Tracker, DataStream, Credit Suisse Research
In terms of how we see the demand environment for next year in electricals, while it may be relatively softer given the uncertainty around the Brexit impact and the lack of major sporting events (which affects the demand for TVs), we do not expect a significant shock to spending in this category either. In the MDA category, for example, demand is relatively inelastic as a significant share of sales volumes is driven by distress purchases. Macro forecasts for the UK see some slowdown in growth: OBR forecasts from the Autumn statement last week still point to GDP growth of 1.4%, albeit lower compared to this year, inflation rising to 2.3% and flat real wage growth, and unemployment ticking up to 5.2%. House prices are forecast to be largely flat next year5 (according to property groups JLL, Savills) while the most recent (Oct) RICS survey of price expectations still sees a net balance of contributors forecasting a price rises over the next 12 months. The low interest rate environment also should be supportive of consumer credit. The overall picture for next year perhaps is one of slower growth, but not one that is in any way similar to the financial crisis and the recession that followed when margins in electrical retailing (and in retail in general) shrank. The structure of the electrical retailing sector in the UK also was substantially different back then, with a lot less consolidation, more competitors and many retailers ill-prepared for the shift to online. We think Dixons Carphone will go into next year better positioned than most peers with an optimal store portfolio post planned closures and the rollout of 3-in-1s (see page 35).
5 http://www.ibtimes.co.uk/uk-house-prices-grow-by-just-0-5-amid-brexit-uncertainty-says-jll-1589317; http://www.savills.co.uk/research/uk/residential-research/forecast-pages/mainstream-capital-values.aspx
Dixons Carphone Plc (DC.L) 27 1 December 2016
UK still has room to grow We believe that while Dixons Carphone's market share in the UK has increased over the last few years, helped by the closures of both Comet and Phones4U businesses and organic share gain, there is still significant share up for grabs. Independents, supermarkets still have 30% of electricals market share One source of potential share gains are supermarkets (c.10% of the market according to recent company presentation) which have been down-sizing their non-food space and de- emphasizing categories such as large appliances and TVs. Supermarkets instead are focusing on home and homewares categories and smaller appliance ranges such as kitchen etc. According to Euromonitor, in terms of volumes the store based grocery retailers have almost halved their share of consumer electronics distribution to c.9% of the overall market, down from 17% 5 years ago. In large appliances their share fell a third to 2.6% of the overall market while maintaining share in small domestic appliances. Independents (c.20% of market) are another major source of market share and we think they have been losing ground in the UK for some time and will continue to do so as they struggle to adapt to an increasingly multichannel world. Margins are usually low and they lack the scale to match the delivery and service propositions of the bigger competitors. There are a few exceptions of course such as BrightHouse which has been adding stores and serves a narrower customer segment, but their business models which are driven by credit are increasingly coming under pressure due to the regulatory environment.
Figure 50: Snapshot of UK electricals market shares UK Electricals Sales (£bn) Share Comment Dixons Carphone 4.1 25% Two-third of UK sales are electricals Argos 2.3 14% 56% of total sales are electricals John Lewis 1.3 8% c.30% of JL is EHT (electricals and home technology) AO 0.6 4% Pure-play online. All electricals sales Independents 3.4 21% BrightHouse, Maplin, Hughes, Euronics, etc. Supermarkets 1.6 10% Mostly Tesco, Asda, Sainsbury Other 3.0 18% Amazon, Apple, other pureplay Total 16.4 100%
Source: Company data, Credit Suisse estimates (for sales, extrapolating most recent results for not covered companies) Our assumptions of market share evolution Competitors such as John Lewis and AO are growing and in decent health and we don’t expect Dixons Carphone to take any significant share away from them. Argos is going through a period of change under the new owners; in the best case it may maintain its market share in the near term, in our view. Amazon is probably still growing in electricals but its price advantage has been largely neutralized. In aggregate, we assume that Dixons, John Lewis and the pure-play retailers (Amazon, AO, etc.) will continue to take ~2- 3 percentage points of market share each year at the expense of supermarkets and independents. It is not unrealistic to see a scenario where Dixons Carphone gets to 30% of UK electricals in five years, in our view. Snapshot of competitors In the following section, we look at metrics of some of the main competitors in the UK market (Argos, John Lewis, AO World) and also delve deeper into some independents and smaller chains in the unquoted sector that have over a billion pounds in sales.
Dixons Carphone Plc (DC.L) 28 1 December 2016
Argos The closest competitor in the UK, Argos, is going through a strategic realignment on its own under new owners Sainsbury. The plan is that the store estate, over the next year or two, will be transformed into fewer stand-alone high street Argos stores and a closure of the entire 100+ concessions within the Homebase estate just as more concessions are opened within existing Sainsbury stores. Cost reduction seems a key driver.
Figure 51: Argos key stats (£m) ARGOS FY12 FY13 FY4 FY15 FY16 Sales 3,873 3,931 4,051 4,096 4,095 growth -7.7% 1.5% 3.1% 1.1% 0.0% LFL -8.9% 2.1% 3.3% 0.6% -2.6% space 1.2% -0.6% -0.2% 0.5% 2.6% Operating profit 94 100 112 129.2 83.1 margin 2.4% 2.5% 2.8% 3.2% 2.0%
Internet sales 39% 42% 44% 46% 49% multi-channel sales 48% 51% 53% 54% 55%
Store numbers 748 737 734 755 845 of which digital format 60 177 Average remaining years 7.1 6.3 5.5 4.9 4.3
Source: Company data
Earlier this year the company said that over 60% of Argos leases expire in the next 5 years and we think there is likely to be a significant churn in the estate over this period. CS forecasts flat sales for Argos over the next two years with an implicit assumption that relocated concession stores will replace lost sales from stores that will close as leases expire. This is after adjusting for the reduction in sales from the closures of concessions in Homebase stores. In our view, Argos is unlikely to gain market share in electricals in the near term given the scale of change in the business and this is likely to benefit Dixons Carphone. Note that over half of Argos sales are electricals with two-thirds of it in consumer electronics – which is mainly AV equipment, TVs, computing, mobile equipment, games hardware etc. with SDA and MDA making up a fifth of Argos sales in the UK. Argos has a sizeable own label product range and more opening price points and we think roughly half or more of the products in electronics/SDA/MDA overlap the Currys PC World range.
Figure 52: Argos sales split Figure 53: We forecast flat sales at best for Argos
5,000
4,000
3,000 m £ 2,000
1,000
0 PF FY16 FY17E FY18E FY19E
Source: Company data (2015) Source: Company data, Credit Suisse estimates
Dixons Carphone Plc (DC.L) 29 1 December 2016
AO World Among pure-play retailers in the electricals space, Amazon and AO together have c.12% of the electricals market in the UK (source: Dixons Carphone presentation). AO, which started operations in 2000, reached £600m of sales last year and has been pushing into expanding into Europe with launches in Germany (2014) and Netherlands (2016). The UK business which grew sales c.30% on average over the last four years saw EBITDA margins of c.3% last year and in Europe the business was loss-making due to start up investment. In the UK, the business has also been expanding its product range beyond large appliances (MDA) which were the core of the business until 2-3 years ago. SDA (small domestic appliances) were added in 2014, AV (audio visual) in 2015 and the company is now pushing into computing. Consensus forecasts have AO growing top-line c.20% for the next few years (at group level), which suggests the UK business could see c£50-100m pa of additional sales; this is roughly equivalent to 50bp of market share, mainly in the MDA category.
Figure 54: AO World key stats (£m) AO WORLD 2012 2013 2104 2015 2016 Sales 209.4 274.9 384.9 476.7 599.2 growth 31% 40% 24% 26% Cost of Revenue 173.4 224.1 310.7 389.1 493.3 Gross Profit 36.0 50.8 74.2 87.6 105.9 gross margin 17.2% 18.5% 19.3% 18.4% 17.7% SG&A Expense 28.7 35.3 47.8 68.4 86.1 Advertising Expense 6.1 7.1 18.2 21.4 30.4 Total Operating Expense 211.0 266.5 392.2 478.9 609.8 Operating Income -1.6 8.4 -7.2 -2.2 -10.6 margin -0.8% 3.1% -1.9% -0.5% -1.8%
UK Revenues 470.9 558.5 Europe Revenues 5.8 40.7 Group adjusted EBITDA 8.5 -3.9 of which UK EBITDA 16.5 17.2 UK margin 3.5% 2.9% Europe EBITDA -8.0 -21.1
Source: Company data Amazon UK There are no disclosures available from Amazon on its electricals business. According to Dixons Carphone's presentation, Amazon has an 8% market share in UK electricals for 2015/16. We think this is predominantly in small domestic appliances and computing and less in large appliances which typically tend to require installation services and recycling of old appliances. News articles6 from 2013 indicated a 5% share, so we think the business has taken ~1ppt of market share each year in the UK. While Amazon's electricals business in the UK is probably still growing, its price advantages vs. both Dixons Carphone and John Lewis have all but disappeared (based on Dixons Carphone's pricing chart) and we think growth rates are not likely to be much different from these peers. However, as we argued in our online report from September, European Online Retail: Looking under the hood, Prime remains a driver of growth for Amazon, given the convenience aspect. We assume the business could continue to take ~0.5% of electrical market share pa.
6 http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10245630/Amazon-is-Britains-most-influential-retailer-and-it- doesnt-even-make-a-profit.html
Dixons Carphone Plc (DC.L) 30 1 December 2016
John Lewis Only c.30% of John Lewis Partnership's non-food sales are electricals and home technology (EHT), the other categories being Fashion and Home. Weekly sales performance data of the EHT segment is disclosed although there are no profit disclosures of the segment in the company's reports. The overall EBIT margin for the non-food side of the business is 7%, and we assume the margins in the EHT segment are much lower. John Lewis continues to add space and operating metrics in the non-food business have been strong in the past few years. The total sales in electricals have been robust this year, +9% Y/Y and have been strong for many years driven by the strong service element, the click-and-collect proposition, the pricing message, and the two-year extended guarantee as standard. If the EHT segment can sustain high single-digit sales growth, the group could add up to £100m of sales each year.
Figure 55: EHT sales strong YTD Figure 56: John Lewis key stats (£m)
John Lewis EHT sales % (4 wk rolling average) 20.0 John Lewis (non-food) 2013 2014 2015 Revenues 3,049 3,274 3,566 15.0 Gross sales growth % 13.5% 7.5% 7.5% Like-for-like sales growth % 10.5% 6.4% 6.5% 10.0 Operating margin % 7.1% 6.9% 7.1%
5.0 Growth by Categories Fashion 9.1% 5.0% 8.3% 0.0 Home 6.2% 2.3% 7.2% EHT 28.9% 15.5% 7.9% -5.0
-10.0 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16
Source: Company data Source: Company data BrightHouse BrightHouse is UK's largest "rent-to-own" retail chain that sells home electronics, domestic appliances and home furniture items. The company has 312 retail outlets and over 270K customers in the UK. The group serves mainly a lower income demographic and customers with impaired credit and provides them access to household goods for weekly payments. Representative APRs are high, 69.9% at the last financial year end, and customer purchase agreements include benefits such as delivery, installation, short-term product replacement and unlimited repairs. EBIT margins are high due to the financing income. The average revenue per customer in the financial year ending 2016 was £120.87 (+5% Y/Y) and LFL revenues +4.7%. Bad debt charge as a proportion of turnover was 9.6%. Perhaps surprisingly, BrightHouse is one of the very few electrical retailers adding space with 12-14 stores on average over the last couple of years. The key risk to this business is the regulatory environment. The responsibility for regulating the rent to own sector transferred from the OFT to the FCA two years ago, and BrightHouse and other RTO forms such as Perfect Home and Buy as You View operate today with an interim permission from the FCA while their applications to the FCA for full authorization are reviewed (due to be completed early 2017). The FCA has identified areas of concern with this sector related to affordability assessments, price transparency and has already imposed fines on one of the operators earlier this year. BrightHouse said in October that changing its customer acquisition processes to include detailed affordability assessments are hurting the business model and are having a
Dixons Carphone Plc (DC.L) 31 1 December 2016
material impact on profitability7. We think the RTO segment is likely to remain under pressure into next year especially if the macro weakens and more customers default on their payments. Press reports8 for example suggest that competitor Buy As You View is cutting staff and shrinking the business in response to the regulatory environment.
Figure 57: BrightHouse key stats (£m) BRIGHTHOUSE LTD 2013 2014 2015 2016 Revenues 297.0 333.3 351.7 370.7 growth 11.4% 3.8% 5.5% 5.4% COGS -123.5 -147.5 -155.5 -171.5 Gross Profit 173.5 185.8 196.2 199.2 margin 58.4% 55.7% 55.8% 53.7% Operating expenses -138.6 -145.9 -152.4 -155.6 % of sales 46.7% 43.8% 43.3% 42.0% Operating profit 35.1 39.8 43.8 43.6 margin 11.8% 11.9% 12.5% 11.7% Stores 280 286 298 312
Source: Company data Maplin Among the smaller niche electrical retailers and independents, Maplin we think is the largest with c£240m of sales in the last reported FY (to March 2015). The business sells electronics and electrical products and also provides technology solutions for consumers and businesses. Product categories are more skewed towards AV equipment, components, TV and computer peripherals, cables, connecters and some everyday electrical products, so the product overlap with a typical Currys PC World store is somewhat limited. The business still has a mail order component and publishes an electronics catalogue each year. Reported operating margins were 4.3% according to data from Companies House. The business had 216 stores in the UK as of January this year. Maplin is owned by Rutland Partners which acquired the business for £85m in 2014. The business is going through a restructuring and investment phase and is trialing new store concepts.
Figure 58: Maplin key stats* (£m) MAPLIN 2014 2015 Revenues 269.2 236.3 growth -12.2% Cost of sales -136.7 -122.3 Gross Profit 132.5 114.0 margin 49.2% 48.3% Distribution costs -43.6 -38.9 % of sales 16.2% 16.5% Admin costs -75.6 -65.4 % of sales 28.1% 27.7% Other income 0.5 0.5 Operating profit 13.9 10.2 margin 5.1% 4.3%
Source: Company data (*note that 2014 reported figures were for the 64 weeks ending in March 2014, 2015 is 52 weeks)
7 https://www.theguardian.com/money/2016/oct/04/brighthouse-admits-affordability-checks-are-hurting-business-model 8 http://www.telegraph.co.uk/business/2016/11/12/struggling-hire-purchase-chain-to-axe-staff/
Dixons Carphone Plc (DC.L) 32 1 December 2016
Richer Sounds This is specialist retailer of hi-fi systems, home cinema, TVs and related equipment with 53 stores in the UK (52 wholly owned in the UK and 1 franchise in Northern Ireland according to company accounts). Richer Sounds is fully owned by Julian Richer who also owns EmpireDirect.co.uk, which is now an online only kitchen appliance specialist.
Figure 59: Richer Sounds key stats (£m) RICHER SOUNDS 2013 2014 2015 2016 Revenues 144.8 143.4 149.1 154.8 growth 4.6% -1.0% 4.0% 3.8% COGS -110.9 -108.3 -113.0 -116.9 Gross Profit 33.9 35.1 36.1 37.9 margin 23.4% 24.5% 24.2% 24.5% Operating expenses -28.9 -29.5 -31.5 -31.3 % of sales 20.0% 20.5% 21.1% 20.2% Operating profit 5.0 5.6 4.6 6.5 margin 3.4% 3.9% 3.1% 4.2%
Source: Company data Combined Independents / Euronics UK This is a buying group which purchases electrical goods on behalf of its shareholders who are independent electrical retailers. Combined Independents (Holdings) acquired Euronics Ltd in 2013/14 and reports financials on a consolidated basis. The Euronics UK business is part of Euronics International which is a buying group of independents 30 countries accounting for c.11K stores. The key metrics the buying group looks at are turnover and membership. Membership has been falling for a few years, although turnover has been modestly up. We think some of the smaller independent retails will struggle to absorb the higher costs from National Living Wage and input costs next year and expect the number of independent retailers to continue to shrink over the coming years.
Figure 60: Combined Independents key stats (£m) 2013 2014 2015 2016 Revenues 306.3 350.8 362.5 372.9 growth 1.7% 3.3% 2.9% Cost of sales -301.8 -345.2 -356.8 -368.4 Gross Profit 4.5 5.6 5.7 4.5 margin 1.5% 1.6% 1.6% 1.2% Admin costs -9.4 -8.7 -10.4 -12.0 % of sales -3.1% -2.5% -2.9% -3.2% Other income 5.5 4.2 5.7 8.7 Operating profit 0.6 1.1 1.0 1.1 margin 0.2% 0.3% 0.3% 0.3% Member 577 559 541 520 change -3.1% -3.2% -3.9%
Source: Company data
Dixons Carphone Plc (DC.L) 33 1 December 2016
Hughes Electrical The business model of Hughes Electrical is somewhat different from the rest of the specialist electrical retailers. Customers can rent electrical products and appliances or finance purchases from Hughes. The company claims it is the 2nd largest provider of home entertainment and kitchen appliance rentals in the UK (after BrightHouse). It also provides financing options for customers to spread the cost of purchase over many months. The group has close to 50 stores in the UK. Hughes also operates a B2B division called Hughes Trade which supplies electrical products to businesses. In the company's latest accounts, Hughes management indicated that they expect product prices to rise by up to 10% over the current financial year as a result of the referendum and while volumes are likely to fall, they expect to see an increase in rental income as customers may shift from buying to renting. Hughes also owns most of its stores.
Figure 61: Hughes Electrical key stats (£m) HUGHES ELECTRICAL 2013 2014 2015 2016 Revenues 102.9 106.9 111.8 113.5 growth 2.1% 3.8% 4.6% 1.5% COGS -74.3 -75.6 -80.1 -80.6 Gross Profit 28.6 31.3 31.7 32.9 margin 27.8% 29.3% 28.4% 29.0% Distribution costs -14.7 -14.7 -15.2 -15.7 % of sales 14.3% 13.7% 13.6% 13.8% Admin costs -11.5 -13.8 -14.8 -15.4 % of sales 11.2% 12.9% 13.2% 13.6% Other income 1.1 0.8 0.9 1.4 Operating profit 3.5 3.7 2.6 3.1 margin 3.4% 3.4% 2.3% 2.8%
Source: Company data
Delivery terms Dixons Carphone's delivery terms are generally in line with key competitors.
Figure 62: Dixons Carphone vs. peers on delivery terms in UK Currys PC World Currys PC World Carphone Warehouse Argos John Lewis ao.com (small items) (large items) Free (Order > £50) £3.5 (< 5days) Standard Delivery Free (< 5days) Free (1-2days) Free (< 4days) Free (1 day) £7.5-10 on Sat and Free (Order >£50) Free (weekdays) Next day delivery £3.95 (Next Day) Free (Order > £50) £3.95 £6.95 Free £4.99 (Saturdays) Next day delivery cutoff time 9 pm 9 pm 5 pm 8 pm 8 pm (variable) Sameday delivery (cutoff time) £3.95 (9:30 am) Only Reserve & collect NA £3.95 (6 pm) NA NA Nominate day/time Nominate day/time Nominate day/time delivery Yes (nominated time slot)Sameday (nominated time slot) Nominated day (£6.95) Nominated time slot delivery delivery CollectPlus store, selected Currys PC World stores Currys PC World stores Carphone Warehouse, Argos store inside John Lewis, Waitrose, Click & collect local shops, petrol stations and selected CRW stores* and selected CRW stores* Currys or PC World store Sainsbury’s Collect+ and supermarkets Return Cost free free free free free free Unwanted: 21 days Unwanted: 21 days Return Window Faulty: 30 days Faulty: 30 days 14 days 30 days 90 days 14 days Damaged: 48 hrs Damaged: 48 hrs Home Pickup, Argos John Lewis, Waitrose, Home pickup, Home pickup, Return Option Post, CRW store Store, Partner Collection Royal Mail, Collect+, Home pickup Currys or PC World store Currys or PC World store point, RoyalMail prepaid Hermes Order tracking Yes Yes Yes Yes Yes Yes
Source: Company websites
Dixons Carphone Plc (DC.L) 34 1 December 2016
UK store optimisation well along Plans set out earlier this year targeted a net 134 store reduction in the UK with the bulk of the reduction coming from the Dixons side of the estate which involved either merging or closing the remaining PC World and Currys stand-alone stores and inserting a Carphone Warehouse into a 3-in-1 format. There were also modest planned reductions to the stand- alone Carphone Warehouse store numbers and the Dixons Ireland store estate. As of June, a third of the large store closures were completed and we expect further progress to be reported at the interims next month. From a financial perspective, the net c.13% space reduction is expected to provide a £20m uplift to next year's EBIT from lower rents (c£30m at EBITDA level) but this comes at a £70m exceptional cash cost (outflow this year) and an incremental capex of £50m this year to support the store refits. While most of the program is expected to be completed in FY16/17, we think that the store portfolio will continue to see modest levels of pruning in the coming years, especially in Carphone Warehouse which still will have close to 700 outlets in the UK.
Figure 63: Dixons stores down c.45% in 6-7 years… Figure 64: … and CPW store numbers down c.15%
UK/Ireland Dixons store numbers UK/Ireland Carphone Warehouse store numbers 700 1000 c.120 net strore reduction 600 c.280 net strore reduction 800 500
400 600
300 400 200 200 100
0 0 2011 2012 2013 2014 2015 2016 Target 2011 2012 2013 2014 2015 2016 Target
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
Many other retailers also are right-sizing their estates (B&Q, Homebase, Argos, M&S etc.) and we think the retail sector will see very little rental inflation going forward.
Figure 65: Optimising space along with most other retailers in Retail Parks 2013 2014 2015 2013 2014 2015 Retail Park Tenants Area Area Area Rank Rank Rank (m.sqft) (m.sqft) (m.sqft) B&Q 1 1 1 8.13 8.07 7.68 Dixons Carphone 3 2 2 5.01 4.95 4.93 Homebase 2 3 3 5.15 4.80 4.25 Matalan 4 4 4 3.85 3.93 4.01 B&M 11 6 5 2.28 2.97 3.66 Next 5 5 6 3.30 3.36 3.55 TK Maxx 9 10 7 2.45 2.68 2.81 Pets at Home 8 9 8 2.60 2.70 2.80 Argos 7 8 9 2.80 2.74 2.73 Carpetright 6 7 10 2.81 2.75 2.66
Source: Trevor Wood Associates
Dixons Carphone Plc (DC.L) 35 1 December 2016
Nordics Dixons Carphone has leading market positions in all the four markets – Norway, Sweden, Denmark and Finland. The region accounts for 29% of group sales and 19% of EBIT (our 2017E forecasts). Margins were soft over the last two years mainly as a result of competition (from Expert), the softer macro environment, and some investments mainly in Norway where prices were not as competitive as some of the pure-play online retailers. The pricing issue however seems to have largely been addressed and we expect to see some stability in the profit profile going forward. The "aspirational, sustainable" longer term EBIT margin target continues to be 4% and while we do not see why this is unachievable, given the UK business does north of 5.5% margin, we conservatively model margins going up only about 30bps to 3.3% over the next three years until we see signs of competition easing. FX was also an issue over the last two years given the weakness of the local currencies vs. the £, but this will now turn into a tailwind this year and help sterling denominated EBIT. Last year also saw the acquisition of InfoCare, a regional repairs business, for £10m and this should support the ramp-up of the service proposition with the rollout of KnowHow while helping margins.
Figure 66: Norway, Sweden are the main markets Figure 67: Store estate is a mix of own/franchise
Finland 14% 120 118
Norway 35% 90 80
Denmark 62 19% Nordics sales 60 £3bn 39 29 30 21 17 13 - - - Sweden Norway Sweden Denmark Finland Other Nordics 33% Own Franchise
Source: Company data, Credit Suisse estimates (2016/17E) Source: Company data (2016)
The portfolio in the Nordics has not seen any significant reductions in store numbers and we think that there could be opportunities to optimise the store estate similar to the UK if the share of online continues to increase as a proportion of overall sales.
Figure 68: Market shares of Dixons vs. main competitors Norway Sweden Denmark Finland Dixons Carphone 35% Dixons Carphone 23% Dixons Carphone 27% Dixons Carphone 25% Expert 13% Media Markt 13% Expert 11% Verkkokauppa 13% Komplett 6% Dustin 11% Fona 11% Expert 12% Source: Company data
Dixons Carphone Plc (DC.L) 36 1 December 2016
Services and CWS The aspiration here is to build two distinct billion pound businesses in technology support services and CWS. Today the combined services operations within the core businesses and the CWS together generate about £0.7bn of sales and we estimate approximately around £50m of EBIT. Services / Team Knowhow This includes the more traditional services operations – delivery and installation, repairs and insurance, technical setup, and customer support. At the time of the merger, the company highlighted that B2C services could be a stand-alone business on its own bringing together the capabilities in KnowHow and Geek Squad. The group generated c£500m revenues from these services (this was the figure quoted two years ago and translated to a c.10% market share in the UK as the company pegged the services and support market at £5bn which roughly broke down as shown in the figure below).
Figure 69: UK service and support market context and opportunity
Source: Company data (2014 Strategy Presentation)
The figure highlights the fragmented nature of the market and the opportunity to gain share in this segment. The group aims to be the leading technology support company in the UK and the other key markets where it operates. The progress so far: ■ A separate team under Group Strategy Director Andrew Lawley has developed a commercial model leveraging existing scale, relationships with customers, manufacturers and suppliers, and repair capabilities to build a subscription/digital membership based model to offer customers a host of support services under the KnowHow brand. ■ A pilot rollout of the proposition was launched in Leeds a couple of months ago putting to test the home services offerings (energy saving, switching, broadband and Wi-Fi expertise) and repairs solutions (for mobile and computing) and to validate the subscription model and the uptake. The idea is to begin rolling out the service
Dixons Carphone Plc (DC.L) 37 1 December 2016
nationwide later this year should the pilot work. We will be looking for an update on this at the interims. ■ Acquiring capabilities such as Simplifydigital last year in the UK for £20m which provides a platform for TV, broadband, phone and energy switching services. In the Nordics, a repair services company InfoCare was acquired for £10m. This also seems to be the strategy Metro is employing in its Media Saturn business which took a minority stake in Deutsche Technikberatung to strengthen its service portfolio in home services for private customers and small businesses. Margins in services are likely higher (we assume roughly 2-3ppt higher than the retail business) and we expect the company to report this segment separately perhaps in a year or so. This should have positive implications for valuation as we believe the services segment should command a higher multiple than the core retailing business. In terms of the medium-term opportunity, we think Dixons Carphone's fair share of the market is probably over 20% closer to their market share in electrical and mobile retailing in the UK. Connected World Services (CWS) This is a much younger business that got off the ground in 2013 and comes from the Carphone side of the transaction. The aspiration here is to leverage the retail expertise and the capabilities of the group and its intellectual property to provide white-label solutions to corporate customers both in electrical and telecom retail as well as in other areas and build longer-term higher-margin profitable relationships with recurring revenues. The move is a focused effort to move up the value chain in retailing and establish consulting and third-party outsourced partnerships with leading brands and retailers in different industries. It is also the least understood business in terms of profitability and the hardest to forecast given the bespoke nature of the individual contracts, the lack of disclosures on the financials of individual transactions, the chunky nature of deal flow and long sales cycle. Compared to the retail segment, this is however a low capex and low opex business and we assume the company aspires to achieve double-digit margins in the medium to long term (current EBIT margins before JV income are c.7%).
Figure 70: The CWS business model
Source: Company data (2014)
Dixons Carphone Plc (DC.L) 38 1 December 2016
The track record so far is strong The current focus of the business is mainly in three areas: Connected Retailing, Support and Services and the honeyBee platform. Product Solutions, where CWS provides sourcing expertise and solutions to third-parties (such as TalkTalk, TheGoodGuys), we think is a very small segment and doesn’t seem to be a priority vertical at the moment. One other area – MVNO (providing white label MVNO solutions) – we believe is still in its infancy. Support and Services Of the various verticals in CWS, the Support & Services segment is the most mature business. Last year, the CWS division reported £11m of EBIT (before JV income) and this largely is made up of profits from the existing contracts with customers such as RBS, TalkTalk, EE etc. mainly to provide solutions such as mobile insurance, reverse logistics, and customer service to name a few. Most of these are sticky and long-term relations and we think it is not unrealistic to expect these and similar contracts to continue to generate £10-15m of EBIT p.a. over the next year or two. For RBS, CWS provides third-party mobile insurance solution; the contract was extended this year. For TalkTalk CWS handles hardware distribution and provides customer service support and mobile insurance. Connected Retailing The vertical builds on Carphone Warehouse's successful expertise helping Best Buy with its mobile strategy and rollout of stores in the US. The current Sprint JV is a marquee deal for CWS. The agreement covers the CWS division rolling out 500 Sprint branded stores in the US for Sprint Corp over the next 3 years and is expected to generate an annual EBIT of $40-50m by FY19/20. Dixons Carphone's investment in the JV is £32m of which £15m will be spent this year. As of July CWS had completed 31 stores across 5 regions in the US and we expect around half of the planned rollout for this year would have been completed by October.
Figure 71: Sprint store rollout plan Stores 2016/17 2017/18 2018/19 Range of stores 130-150 140-160 180-200 Target 144 309 500 Source: Company data
Technology Platform For the rollout of the proprietary honeyBee platform (the omni-channel assisted sales tool developed in partnership with Accenture), Apple was the first customer in the UK. The Apple relationship was subsequently extended to rolling out honeyBee in Canada, Germany and the US (although the US rollout has not yet started). The opportunity lies in extending the rollout of honeyBee to the rest of Apple's geographies. CWS also has reached an agreement with Sprint to roll out the honeyBee platform across the entire Sprint estate in the US (this is not part of the JV and is a separate software agreement).
Dixons Carphone Plc (DC.L) 39 1 December 2016
Financials Recap of guidance for FY16/17 Elevated Capex of £250m: Capex was elevated last year reflecting the investments into the Carphone Warehouse store within a store (SWAS) rollout as well as on IT platforms and CWS. The guidance for this year was c. £250m driven by an incremental £50m in the property program for 3-in-1 rollout and refurbs. Exceptional cash outflow of c.£90m: £70m of this is to do with the property program. There was also the £15m of investment in the Sprint JV, which is the first year's share of the £32m JV investment. Interest charge of £20m: This is lower than last year, and should nudge lower as we assume FCF generated will be used to reduce the balance sheet debt. Pension cash outflow of £36m: The guidance for this year was a £36m cash contribution to the pension and this is likely to edge higher into next year as the outcome of the pension tri-annual valuation becomes clear.
Figure 72: Capex should edge lower post 2017E Capex & Depreciation 2014 2015 2016 2017E 2018E 2019E 2020E Acquisition of PPE 20 85 157 166 137 125 123 % of sales 1.0% 1.0% 1.6% 1.6% 1.3% 1.2% 1.1% Acquisition of Intangibles 48 88 63 76 78 80 83 % of sales 2.5% 1.1% 0.6% 0.7% 0.7% 0.7% 0.7% Capex 68 173 220 243 215 205 205 % of sales 3.5% 2.1% 2.3% 2.4% 2.0% 1.9% 1.8%
Depreciation 17 83 98 104 106 109 112 % of sales 0.9% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Amortisation 28 66 79 81 87 88 90 % of sales 1.4% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8%
Source: Company data, Credit Suisse estimates Operating costs Benefit on rents next year: The net benefit of the property program is a reduction in net rents to the tune of £20m which should reflect in the P/L next year. Staff costs elevated on NLW: We also assume staff costs will edge higher due to the impact of NLW and apprentice levy.
Figure 73: Operating costs breakdown (£m) Operating Expenses 2014 2015 2016 2017E 2018E 2019E 2020E Depreciation and amortization 45 149 177 184 193 197 202 % of sales 2.3% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% Net Rents 70 321 351 362 343 342 341 % of sales 3.6% 3.9% 3.6% 3.5% 3.3% 3.2% 3.1% Staff costs 230 900 1,061 1,135 1,165 1,204 1,239 % of sales 11.8% 10.9% 10.9% 11.0% 11.1% 11.1% 11.1% Other costs 72 367 124 82 92 95 106 Total 417 1,737 1,713 1,763 1,793 1,839 1,889 % of sales 21.5% 21.0% 17.6% 17.1% 17.0% 17.0% 16.9%
Source: Company data, Credit Suisse estimates
Dixons Carphone Plc (DC.L) 40 1 December 2016
Figure 74: Adj. Net Debt / EBITDAR likely to move lower Leverage and Returns 2014 2015 2016 2017E 2018E 2019E 2020E Net Debt (£m) 7 256 265 282 170 42 (69) Rental Expense 71 326 357 362 343 342 341 Capitalized Leases (8x) 568 2,608 2,856 2,893 2,744 2,738 2,728 Net Debt / EBITDA 0.0 0.5 0.4 0.4 0.2 0.1 -0.1 Lease adj. net debt / EBITDAR 2.3 3.3 3.1 3.0 2.7 2.5 2.3 Invested Capital 4,132 4,205 4,395 4,474 4,507 4,554 Return on Invested Capital 7% 8% 9% 9% 9% 10% Capital Employed 3,019 3,125 3,330 3,439 3,498 3,573 Return on Capital Employed 10% 11% 11% 12% 12% 13% Capital Employed (lease adjusted, ex-goodwill) 2,638 2,927 3,169 3,130 3,182 3,247 Adjusted ROCE 21% 21% 21% 21% 21% 22%
Source: Company data, Credit Suisse estimates 1H Preview September and October were clearly strong for electronics, helped by iPhone 7 sales and according to BRC categories such as audio-accessories, televisions and computers also sold well possibly in anticipation of later price increases. Comps are also easier in the UK/Ireland into 2Q and we expect some LFL benefit from sales transfers from closed stores (~2ppt). In terms of profitability, there is the ongoing contribution from synergy benefit from the merger that should be fully realised this year. This is reflected in the higher margin we model in the UK.
Figure 75: Quarterly LFLs
Period 13 months 13 weeks 13 weeks 26 weeks 10 weeks 16 weeks 26 weeks 12 months 13 weeks 13 weeks 26 weeks To 02-May-15 01-Aug-15 31-Oct-15 31-Oct-15 09-Jan-16 30-Apr-16 30-Apr-16 30-Apr-16 30-Jul-16 29-Oct-16 29-Oct-16 LFL Growth FY15 1Q16 2Q16 1H16 3Q16 4Q16 2H16 FY16 1Q17 2Q17E 1H17E UK & Ireland 8% 10% 4% 7% 5% 4% 5% 6% 4% 7% 6% Nordics 4% 4% 0% 1% 3% 9% 6% 4% 2% 5% 4% Southern Europe -5% 0% 7% 4% 9% 0% 4% 4% 13% 6% 10% Group 6% 8% 3% 5% 5% 5% 5% 5% 4% 0% 2% Source: Company data, Credit Suisse estimates
Dixons Carphone Plc (DC.L) 41 1 December 2016
Figure 76: Dixons Carphone interims INCOME STATEMENT (£million) 1H15 2H15 2015 1H16 2H16 2016 1H17 2H17 2017E Headline Revenue 3,035 5,220 8,255 4,394 5,344 9,738 4,705 5,615 10,320 Pro-forma Revenue 4,530 5,220 9,750 4,394 5,344 9,738 4,705 5,615 10,320 growth % -8.9% 9.2% 1.9% -3.0% 2.4% -0.1% 7.1% 5.1% 6.0% LFL 5.0% 7.0% 6.0% 5.0% 5.0% 5.0% 2.0% 0.0% 1.0% space and other -13.9% 2.2% -4.1% -8.0% -2.6% -5.1% 5.1% 5.1% 5.0% Cost of sales -6,118 -7,553 Gross profit 2,137 2,185 2,270 Gross Margin 25.9% 22.4% 22.0% Operating expenses (inc-D&A) -1,737 -1,713 -1,763 D&A (excl. amort. of acquisition intangibles) -43 -71 -114 -65 -72 -137 -66 -79 -144 % of sales 1.4% 1.4% 1.4% 1.5% 1.3% 1.4% 1.4% 1.4% 1.4% D&A (inc. amort. of acquisition intangibles) -59 -90 -149 -85 -92 -177 -86 -99 -184 EBITDA 157 357 514 200 405 605 215 437 652 margin 5.2% 6.8% 6.2% 4.6% 7.6% 6.2% 4.6% 7.8% 6.3% Headline EBIT before JV share 400 472 150 357 507 Share of results of joint ventures 0 -4 -1 1 0 Headline EBIT 114 286 400 135 333 468 149 358 507 EBIT Margin 3.8% 5.5% 4.8% 3.1% 6.2% 4.8% 3.2% 6.4% 4.9% Pro-forma EBIT 120 293 413 135 333 468 149 358 507 % of sales 4.2% 4.8% Non-Headline operating Items -27 -49 -76 -35 -129 -164 -35 -35 -70 Amort. of acquisition intangibles -16 -19 -35 -20 -20 -40 -20 -20 -40 Merger costs -11 -30 -41 -15 -37 -52 -5 -5 -10 Other costs -72 -10 -10 -20 Reported EBIT 87 237 324 100 204 304 437 Finance Income 6 9 15 9 8 17 9 8 17 Finance Cost -18 -21 -39 -23 -15 -38 -20 -17 -37 Headline PBT 102 274 376 121 326 447 138 349 487 Pro-forma PBT 98 283 381 121 326 447 138 349 487 Non-Headline non-operating Items -4 -9 -13 -8 -12 -20 0 0 0 Reported PBT 71 216 287 78 185 263 -11 428 417 Income tax (expense)/credit -23 -68 -91 -35 -75 -110 -35 -87 -122 Tax Rate 24.2% 24.6% 25% 25% 25.0% Profit after tax – continuing operations 79 206 285 86 251 337 104 262 366 Source: Company data, Credit Suisse estimates
Dixons Carphone Plc (DC.L) 42 1 December 2016
Figure 77: Divisional P&L DIVISIONAL BREAKDOWN (£million) 1H15 2H15 2015 1H16 2H16 2016 1H17 2H17 2017E UK & Ireland Headline Revenue 2,009 3,497 5,506 2,872 3,532 6,404 2,886 3,567 6,454 Pro-forma Revenue 2,818 3,496 6,314 2,872 3,532 6,404 2,886 3,567 6,454 YoY Growth 3% 7% 5% 2% 1% 1% 1% 1% 1% LFL 6% 10% 8% 7% 5% 6% 6% 6% 6% Space and other -3% -3% -3% -5% -4% -5% -5% -5% -5% Headline EBIT 82 231 313 101 264 365 104 272 376 % of Sales 4.1% 6.6% 5.7% 3.5% 7.5% 5.7% 3.6% 7.6% 5.8% Pro-format EBIT 77 228 305 101 264 365 104 272 376 % of sales 2.7% 6.5% 4.8% 3.5% 7.5% 5.7% 3.6% 7.6% 5.8% Non Headline Items -10 -25 -35 -12 -120 -132 Reported EBIT 72 206 278 89 144 233 Nordics Headline Revenue 698 1,357 2,055 1,198 1,434 2,632 1,412 1,604 3,016 Pro-forma Revenue 1,352 1,357 2,709 1,198 1,434 2,632 1,412 1,604 3,016 YoY Growth -23% 20% -6% -11% 6% -3% 18% 12% 15% LFL 5% 3% 4% 1% 6% 4% 4% 2% 3% FX -10% -13% 4% -9% 14% 10% 12% Space and other -19% 1% -5% 2% 0% 0% 0% Headline EBIT 23 37 60 30 49 79 37 57 95 % of Sales 3.3% 2.7% 2.9% 2.5% 3.4% 3.0% 2.7% 3.6% 3.1% Pro-format EBIT 38 48 86 30 49 79 37 57 95 % of sales 2.8% 3.5% 3.2% 2.5% 3.4% 3.0% 2.7% 3.6% 3.1% Non Headline Items -2 -12 -14 -6 -17 -23 Reported EBIT 21 25 46 24 32 56 Southern Europe Headline Revenue 261 303 564 257 293 550 315 342 657 Pro-forma Revenue 303 303 606 257 293 550 315 342 657 YoY Growth -28% -13% -21% -15% -3% -9% 23% 17% 19% LFL -11% 4% 4% 4% 10% 8% 9% FX -6% -9% -1% -4% 15% 11% 13% Space Growth -11% -10% -7% -9% -2% -2% -2% Headline EBIT 5 15 20 1 16 17 3 19 23 % of Sales 1.9% 5.0% 3.5% 0.4% 5.5% 3.1% 1.0% 5.7% 3.4% Pro-format EBIT 1 14 15 1 16 17 3 19 23 % of sales 0.3% 4.6% 2.5% 0.4% 5.5% 3.1% 1.0% 5.7% 3.4% Non Headline Items -1 -1 -2 -1 -1 -2 Reported EBIT 4 14 18 0 15 15 Connected World Services Headline Revenue 67 63 130 67 85 152 90 102 192 Pro-forma Revenue 57 64 121 67 85 152 90 102 192 YoY Growth 39% 73% 55% 18% 33% 26% 35% 20% 27% Headline EBIT (before JV) 4 3 7 3 8 11 4 10 14 % of Sales 6.0% 4.8% 5.4% 4.5% 9.4% 7.2% 4.5% 9.4% 7.1% Pro-format EBIT 4 3 7 3 8 11 4 10 14 Source: Company data, Credit Suisse estimates
Dixons Carphone Plc (DC.L) 43 1 December 2016
Financial Model
Figure 78: Dixons Carphone income statement INCOME STATEMENT (£m) 2014 2015 2016 2017E 2018E 2019E 2020E Total Revenue 1,943 8,255 9,738 10,320 10,541 10,848 11,166 growth 18.0% 6.0% 2.1% 2.9% 2.9% Cost of sales (1,392) (6,118) (7,553) (8,049) (8,222) (8,462) (8,709) Gross profit 551 2,137 2,185 2,270 2,319 2,387 2,456 Gross Margin 28% 26% 22% 22% 22% 22% 22% Operating expenses (417) (1,737) (1,713) (1,763) (1,793) (1,839) (1,889) Headline EBITDA 182 549 645 692 724 760 803 D&A 45 149 177 184 193 197 202 Headline EBIT before JV share 134 400 472 507 526 548 568 Share of results of joint ventures 3 0 (4) 0 5 15 33 Headline EBIT 137 400 468 507 531 563 601 EBIT Margin 7.1% 4.8% 4.8% 4.9% 5.0% 5.2% 5.4% Non-Headline operating Items (51) (76) (164) (70) (40) (40) (40) Reported EBIT 86 324 304 437 491 523 561 Finance Income 8 15 17 17 17 17 17 Finance Cost (17) (39) (38) -37 -33 -29 -26 Net interest cost (9) (24) (21) (20) (16) (12) (9) Headline PBT 128 376 447 487 515 551 592 Non-Headline non-operating Items 0 (13) (20) 0 0 0 0 Reported PBT 77 287 263 417 475 511 552 Income tax (expense)/credit (25) (91) (110) (122) (129) (138) (148) Tax Rate 20% 24% 25% 25% 25% 25% 25% Profit after tax – continuing operations 103 285 337 366 386 413 444 Non-Headline tax (expense)/credit 6 15 26 18 10 10 10 Loss after tax – discontinued operations -10 -114 -18 Reported Net Income 48 97 161 313 356 383 414 Weighted average shares & EPS (p) For basic EPS (million) 555 961 1,150 1,150 1,150 1,135 1,113 Dilutive effect of share options and other schemes 7 32 38 30 30 30 30 For diluted EPS 562 993 1,188 1,180 1,180 1,165 1,143 Basic Headline EPS – cont. ops (p) 18.6 29.7 29.3 31.8 33.6 36.4 39.9 Diluted Headline EPS – cont. ops (p) 18.3 28.7 28.4 31.0 32.7 35.4 38.8 Basic EPS – Reported (continuing ops) 10.4 22 15.6 33.3 34.5 37.3 40.8 Diluted EPS – Reported (continuing ops) 10.3 21.2 15.1 32.5 33.6 36.3 39.7 Basic EPS – Reported 8.6 10.1 14.0 27.2 31.0 33.7 37.2 Diluted EPS – Reported 8.5 9.8 13.6 26.5 30.2 32.9 36.2 DPS (p) 6.0 8.5 9.8 10.6 11.5 12.5 13.4 Payout 70% 87% 72% 40% 38% 38% 37% Source: Company data, Credit Suisse estimates
Dixons Carphone Plc (DC.L) 44 1 December 2016
Figure 79: Dixons Carphone balance sheet BALANCE SHEET (£million) 2014 2015 2016 2017E 2018E 2019E 2020E Goodwill 481 2,989 3,054 3,054 3,054 3,054 3,054 Intangible assets 136 525 540 536 527 519 512 Property, plant & equipment 90 327 366 429 459 475 486 Interests in joint ventures 5 20 42 57 90 Trade and other receivables 191 318 408 442 459 473 487 Deferred tax assets 54 263 234 234 234 234 234 Non-current assets 952 4,422 4,607 4,714 4,776 4,812 4,862 Inventory 240 920 958 1,059 1,081 1,113 1,145 Trade and other receivables 821 907 1,131 1,226 1,273 1,311 1,349 Cash and cash equivalents 283 163 233 216 278 356 417 Current assets 1,344 1,990 2,322 2,500 2,632 2,779 2,912 Assets held for sale 11 137 Total assets 2307 6549 6929 7,215 7,408 7,591 7,774 Trade and other payables 869 1,961 2,310 2,423 2,475 2,547 2,622 Deferred and contingent consideration 25 25 12 12 12 12 12 Income tax payable 36 89 89 89 89 89 89 Provisions and other current liabilities 51 179 80 80 80 80 80 Current liabilities 981 2,254 2,491 2,604 2,656 2,728 2,803 Trade and other payables 113 496 423 444 453 466 480 Deferred and contingent consideration 25 6 21 21 21 21 21 Loans and other borrowings 290 330 409 409 359 309 259 Finance lease obligations 89 89 89 89 89 89 Retirement benefit obligations 489 474 438 399 359 318 Deferred tax liabilities 18 101 115 115 115 115 115 Provisions 21 47 47 47 47 47 Total Non-current liabilities 446 1,532 1,578 1,563 1,483 1,406 1,329 Total liabilities 1,427 3,786 4,069 4,167 4,139 4,135 4,132 Share capital 1 1 1 1 1 1 1 Share premium reserve 283 2,256 2,256 2,256 2,256 2,256 2,256 Accumulated profits 1,355 1,369 1,398 1,586 1,807 1,994 2,180 Translation reserve (9) (113) (45) (45) (45) (45) (45) Demerger reserve (750) (750) (750) (750) (750) (750) (750) Equity attributable to equity holders of the parent compa8n8y0 2,763 2,860 3,048 3,269 3,456 3,642 Non-Controlling Interest Total Equity 880 2,763 2,860 3,048 3,269 3,456 3,642 check 0 0 0 0 0 0 0 Net Debt (Cash) 7 256 265 282 170 42 (69)
Source: Company data, Credit Suisse estimates
Dixons Carphone Plc (DC.L) 45 1 December 2016
Figure 80: Dixons Carphone cash flow statement CASH FLOW (£million) 2014 2015 2016 2017E 2018E 2019E 2020E Reported EBIT – continuing operations 86 324 304 437 491 523 561 Depreciation and amortisation 40 149 177 184 193 197 202 Share-based payment charge 4 10 10 Share of results of joint ventures 19 4 0 (5) (15) (33) Impairments and other non-cash items 4 4 Operating cash flows before WC 149 487 499 622 679 705 730 Movements in working capital: 284 (372) (97) (96) (26) 3 3 (Increase) / decrease in inventory 81 6 (18) (101) (23) (31) (33) (Increase) in receivables 114 (89) (247) (129) (65) (50) (52) Increase / (decrease) in payables 89 (289) 168 134 62 85 88 Increase / (decrease) in provisions (20) (5) 83 Cash generated from operations 413 110 485 526 653 708 733 Special contributions to DB pension scheme (28) (35) (36) (39) (40) (41) Income tax paid (15) (39) (56) (104) (119) (128) (138) Net cash flows from operating activities 398 43 394 386 495 541 554 Interest received 2 1 Cash acquired on the Merger 347 Acquisition of subsidiaries (317) (25) (50) Proceeds from disposal of PPE 10 11 24 Proceeds on sale of business and short term investments 5 8 Acquisition of PPE and other intangibles (57) (166) (221) (243) (215) (205) (205) Investment (Net receipts) in joint ventures 2 (9) (15) (17) 0 0 Net cash flows from investing activities (355) 176 (256) (258) (232) (205) (205) Interest paid (14) (30) (20) (20) (16) (12) (9) Repayment of obligations under finance leases (2) (7) (6) Issue of shares 124 Net purchase of own shares (12) (5) (50) (75) Equity dividends paid (30) (52) (106) (125) (135) (146) (153) Increase / (decrease) in borrowings 19 (211) 25 0 (50) (50) (50) Other Financing Cashflows (3) (42) (5) Net cash flows from financing activities 82 (342) (117) (145) (201) (258) (287) Total Cash flow Continuing operations 125 (123) 21 (17) 62 78 62 Discontinued operations 41 3 32 Increase/(decrease) in cash and cash equivalents 166 (120) 53 (17) 62 78 62 Cash and cash equivalents at beginning of the period 117 283 163 233 216 278 356 Currency translation differences 17 Cash and cash equivalents at end of the period 283 163 233 216 278 356 417 Free Cash Flow (123) 173 143 280 336 349 % of sales -1.5% 1.8% 1.4% 2.7% 3.1% 3.1% Source: Company data, Credit Suisse estimates
Dixons Carphone Plc (DC.L) 46 1 December 2016
Credit Suisse PEERs PEERs is a global database that captures unique information about companies within the Credit Suisse coverage universe based on their relationships with other companies – their customers, suppliers and competitors. The database is built from our research analysts’ insight regarding these relationships. Credit Suisse covers over 3,000 companies globally. These companies form the core of the PEERs database, but it also includes relationships on stocks that are not under coverage. For more information, see our November 2016 PEERs report: A chain reaction: Supply chain strategies.
Figure 81: Dixons Carphone PEERs map
Source: Credit Suisse PEERs
Dixons Carphone Plc (DC.L) 47 1 December 2016
Companies Mentioned (Price as of 29-Nov-2016) AO World (AO.L, 162.4p) Amazon com Inc. (AMZN.OQ, $762.52) Apple Inc (AAPL.OQ, $111.46) B&M European Retail (BMEB.L, 249.5p) BT Group (BT.L, 354.35p) Best Buy (BBY.N, $45.62) Cnova N.V. (CNV.OQ, $5.46) Dixons Carphone Plc (DC.L, 335.4p, OUTPERFORM, TP 420.0p) Groupe Fnac (FNAC.PA, €69.22) J Sainsbury (SBRY.L, 233.2p) Kingfisher (KGF.L, 357.5p) METRO AG (MEOG.DE, €27.865) Marks & Spencer (MKS.L, 328.3p) Next (NXT.L, 4939.0p) Royal Bank of Scotland (RBS.L, 197.0p) Samsung Electronics (005930.KS, W1,677,000) Sprint Corp (S.N, $8.0) TalkTalk (TALK.L, 162.0p) Tesco (TSCO.L, 208.85p) Via Varejo S.A (VVAR11.SA, R$9.2) Vodafone Group (VOD.L, 194.25p) Wal-Mart Stores, Inc. (WMT.N, $71.37)
Disclosure Appendix Analyst Certification Pradeep Pratti, CFA, and Simon Irwin each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Dixons Carphone Plc (DC.L) 48 1 December 2016
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (63% banking clients) Neutral/Hold* 38% (59% banking clients) Underperform/Sell* 15% (55% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html . Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research:
Target Price and Rating Valuation Methodology and Risks: (12 months) for Dixons Carphone Plc (DC.L) Method: Our 12-month target price of 420p is derived using equally-weighted discounted cash flow (5.0% terminal EBIT margin and 8.5% weighted average cost of capital) and multiples-based (11.5x 12M P/E) valuation methodologies. We rate the stock Outperform given the significant upside potential indicated by our target price. Risk: The main risk to our 420p target price and Outperform rating is macro related if the demand environment deteriorates in the UK. Weak sterling and increasing wages also may pressure margins if the company is unable to pass through higher prices. There are some execution risks: the UK store optimization program including closures and 3-in-1 conversions, which is halfway through, and the rollout of the 500 stores under the Sprint JV.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (DC.L, 005930.KS, MKS.L, TALK.L, AAPL.OQ, BMEB.L, RBS.L, CNV.OQ, BBY.N, AMZN.OQ, KGF.L, S.N, WMT.N, VOD.L, BT.L) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (005930.KS, AAPL.OQ, RBS.L, CNV.OQ, BBY.N, KGF.L, WMT.N) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (RBS.L) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (RBS.L) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (005930.KS, AAPL.OQ, RBS.L, CNV.OQ, BBY.N, KGF.L, WMT.N) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (DC.L, 005930.KS, MKS.L, TALK.L, AAPL.OQ, BMEB.L, TSCO.L, RBS.L, CNV.OQ, SBRY.L, BBY.N, AMZN.OQ, KGF.L, VVAR11.SA, S.N, WMT.N, VOD.L, BT.L) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (RBS.L) within the past 12 months As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (BMEB.L). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (005930.KS). Credit Suisse has a material conflict of interest with the subject company (S.N) . Credit Suisse acted as financial advisor to a shareholder of Clearwire in connection with the announced proposed acquisition of Clearwire by Sprint.
Dixons Carphone Plc (DC.L) 49 1 December 2016
For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit- suisse.com/disclosures/view/report?i=272758&v=7hmwsms5u9ebfwtmwyex76r3e . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (TALK.L, KGF.L). The following disclosed European company/ies have estimates that comply with IFRS: (DC.L, MKS.L, TALK.L, TSCO.L, RBS.L, SBRY.L, NXT.L, BBY.N, KGF.L, VOD.L, BT.L). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (AAPL.OQ, RBS.L, CNV.OQ, VVAR11.SA, S.N, WMT.N) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse International...... Pradeep Pratti, CFA ; Simon Irwin To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse International...... Pradeep Pratti, CFA ; Simon Irwin Important Credit Suisse HOLT Disclosures With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report. The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur. Additional information about the Credit Suisse HOLT methodology is available on request. The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur. CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.
Dixons Carphone Plc (DC.L) 50 1 December 2016
This report is produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who-we-are This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates.The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in European Union (except Switzerland): by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Germany: Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). United States and Canada: Credit Suisse Securities (USA) LLC; Switzerland: Credit Suisse AG; Brazil: Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; Mexico: Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); Japan: by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau ( Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; Hong Kong: Credit Suisse (Hong Kong) Limited; Australia: Credit Suisse Equities (Australia) Limited; Thailand: Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok10500, Thailand, Tel. +66 2614 6000; Malaysia: Credit Suisse Securities (Malaysia) Sdn Bhd; Singapore: Credit Suisse AG, Singapore Branch; India: Credit Suisse Securities (India) Private Limited (CIN no.U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India as Research Analyst (registration no. INH 000001030) and as Stock Broker (registration no. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777; South Korea: Credit Suisse Securities (Europe) Limited, Seoul Branch; Taiwan: Credit Suisse AG Taipei Securities Branch; Indonesia: PT Credit Suisse Securities Indonesia; Philippines:Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Additional Regional Disclaimers Hong Kong: Credit Suisse (Hong Kong) Limited ("CSHK") is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an Australian financial services licence (AFSL) and is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (the Act) under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Act). Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Australia (to the extent services are offered in Australia): Credit Suisse Securities (Europe) Limited (“CSSEL”) and Credit Suisse International (“CSI”) are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority under UK laws, which differ from Australian Laws. CSSEL and CSI do not hold an Australian Financial Services Licence (“AFSL”) and are exempt from the requirement to hold an AFSL under the Corporations Act (Cth) 2001 (“Corporations Act”) under Class Order 03/1099 published by the Australian Securities and Investments Commission (“ASIC”), in respect of the financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's professional clients and eligible counterparties as defined by the FCA, and wholesale clients as defined under section 761G of the Corporations Act. Credit Suisse (Hong Kong) Limited (“CSHK”) is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Credit Suisse Securities (USA) LLC (CSSU) and Credit Suisse Asset Management LLC (CSAM LLC) are licensed and regulated by the Securities Exchange Commission of the United States under the laws of the United States, which differ from Australian laws. CSSU and CSAM LLC do not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1100 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Malaysia: Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. Singapore: This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore Branch to overseas investors (as defined under the Financial Advisers Regulations). Credit Suisse AG, Singapore Branch may distribute reports produced by its foreign entities or affiliates pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact Credit Suisse AG, Singapore Branch at +65-6212-2000 for matters arising from, or in connection with, this report. By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore Branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the “FAA”), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore Branch may provide to you. UAE: This information is being distributed by Credit Suisse AG (DIFC Branch), duly licensed and regulated by the Dubai Financial Services Authority (“DFSA”). Related financial services or products are only made available to Professional Clients or Market Counterparties, as defined by the DFSA, and are not intended for any other persons. Credit Suisse AG (DIFC Branch) is located on Level 9 East, The Gate Building, DIFC, Dubai, United Arab Emirates. EU: This report has been produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-US customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. US customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the US. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials,management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2016 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
Dixons Carphone Plc (DC.L) 51