Dixons Carphone PLC – Having a substantial liquidity headroom to withstand the challenging period.

Dixons Carphone PLC (LON: DC.) is a FTSE 250-listed electrical and telecommunications retailer, which provides a full range of services and support across the value chain, ranging from mobile virtual network operator services to consumer electricals and mobile phones.

On 16 December 2020, the Company expects to release the interim results for FY21.

Investment Rationale – Buy at GBX 83.43

• Over the past five years (FY15 – FY20), the Company’s revenue has surged from GBP 8,255 million in FY15 to GBP 10,170 million in FY20, representing a compounded annual growth rate (CAGR) stood ~4.26%.
• The key trading multiples (EV/Sales, EV/EBITDA, Price/Earnings, Price/Cash Flow and Price/Book) are currently undervalued compared to corresponding multiples of the Consumer Cyclicals industry.
• The stock is slightly below 52-low mid, while RSI-14 (~46.92) is supporting the upside potential, a short-term rebound can be expected.
• Holding over £1 billion of liquidity headroom, which would provide confidence to invest and security against downside risk.

Risk Assessments

• Covid-19 is having an impact across the Company’s business in every operational function and geography, which is reducing cash flow and profitability.
• Further, a slump in the consumer purchasing power due to massive lay-offs and furloughs could have a weigh on the demand side.
• The failure to optimize the digital opportunities can reduce the market share.

Recent News:

4 August 2020: The Company proposed new management structure of its UK & Ireland stores, to improve the customer experience.

Financial Highlights (for the 53 Weeks Ended 2 May 2020)

 (Source: Company Website)

• In FY20, the Company’s adjusted profit before tax plunged to £166 million from £339 million in FY19 due to Mobile performance and Covid-19 closures.
• However, the Company gained market share in both online and in stores.
• At year-end, net debt slightly increased to £284 million as reduced capital expenditures offset the working capital outflow caused by lower sales.
• Regarding liquidity at year-end, the Company had over £1billion of unutilized committed debt facilities.

One Year Share Price Chart

 1-Year Chart as of 10 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

Given the heightened level of uncertainties, Dixons could not provide financial guidance for FY21. However, the Company has substantial liquidity headroom to provide confidence to invest and security against downside risk. Moreover, the technology retailing sector has been resilient during the crisis. The Company has market leadership, competitive pricing, and strong supplier relationships to successfully navigate the challenging period. Stock 52 week High and Low were GBX 166.45 and GBX 53.50, respectively.

Based on the factors discussed above, we have given a “Buy” recommendation on Dixons Carphone PLC at the current market price of GBX 83.43 (as on 10 September 2020, before the market close at 8.05 AM GMT+1) with lower double-digit upside potential based 9.82x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Mitchells & Butlers PLC – Well positioned to benefit from recovery on re-opening.

Established in 1898, Mitchells & Butlers PLC (LON: MAB) is a FTSE 250 listed Company, which operates pubs and restaurants in the United Kingdom.

In September 2020, the Company expects to release a pre-closing trading update.

Investment Rationale – Buy at GBX 156.60

• Over the past five years (FY14 – FY19), the Company’s revenue has surged from GBP 1,970 million in FY14 to GBP 2,237 million in FY19, representing a compounded annual growth rate (CAGR) stood ~2.57%.
• The key trading multiples (EV/Sales, EV/EBITDA, Price/Earnings, Price/Cash Flow and Price/Book) multiples are currently undervalued compared to corresponding multiples of the Hotels & Entertainment Services industry.
• The stock is slightly below 52-low mid while RSI-14 (45.19) is supporting the upside potential, a short-term rebound can be expected.

Risk Assessments

• Social distancing measures will significantly reduce the capacity of the business, and the duration of distancing measures is uncertain.
• The massive shift in consumer demand patterns would require additional costs to address.
• The prolonged lockdown scenario can significantly impact the cash flows and liquidity position, especially when the Company has already reported a loss in H1 FY20.

Half-Year Results (for the 28 weeks ended 11 April 2020, as on 2 July 2020)

(Source: Company Website)

• In H1 FY20, the Company demonstrated strong operational performance prior to lockdown.
• MAB also entered new financing arrangements to provide flexibility and security.
• First-half trading reflects around four weeks of enforced closure due to Covid-19.
• At the end of H1 FY20, the Company had committed facilities of £250 million, with a Net debt of £2.2 billion including £543 million of lease liabilities (following adoption of IFRS 16).

One Year Share Price Chart

 1-Year Chart as of 10 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

The Company could not provide any meaningful guidance for FY20. However, it has industry-leading operational skills, diversified and well-loved brands, which made them perform well before the enforced closure. Currently, re-opening in Germany shows signs of recovery.

Moreover, the Company had extended liquidity to navigate these uncertain times. It has a clear path plan for reopening and return to growth and profitability. The fundamentals of the Company are intact; however, it cannot rule out the short-term disruption due to the challenging market conditions. Stock 52 week Low and High were GBX 92.30 and GBX 483.00, respectively.

Based on the factors as discussed above, we have given a “Buy” recommendation on Mitchells & Butlers PLC at the current market price of GBX 156.60 (as on 10 September 2020, before the market close at 11.47 AM GMT+1) with lower double-digit upside potential based 16.00x Price/NTM Cash Flow (approx.) on FY20E Cash Flow Per Share (approx.).

*All forecasted figures and Peer/Industry Information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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