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Credit Suisse drops target on Dixons on 'challenging outlook'
Analysts at Credit Suisse cut their projections for retailer Dixons Carphone's annual pre-tax profits in 2018/19 by 20% on Wednesday as a result of the firm's revelation that the all-important metric would come in at "around £300m".
The Swiss broker ventured a guess that the decline in profits was "entirely driven" by Dixons' UK and Ireland segment, where the broker modeled sales to fall 2% year-on-year following a 1% decline posted last year, and an EBIT margin that had contracted to 2.9% from 6.2% a year earlier as a result of a "challenging outlook" across both its electricals and mobile wings.
"Unpicking the underlying UK and Ireland retail profit is challenging given the large number of one-offs and adjustments in the past two years," analysts at the broker told clients.
"We estimate core UK and Ireland EBIT for the retail business declined circa 24% in 2017/18."
In tandem, they also lowered their target price on Dixons's shares from 210p to 190p, reiterating their 'neutral' stance in the process.
Significantly, the dividend cover was set to fall to two times free cash flow, versus management's target of three times FCF.
"We suspect the question around dividend sustainability will be back on the table should trading deteriorate over the next 2-3 quarters," the broker said.
Furthermore, while CS agreed with Dixons CEO's diagnosis of the issues at the company, the broker noted that negotiations with networks were still ongoing and that the future shape of its mobile business was "still unclear".
"We see no reason to turn positive until visibility improves."