This bargain retailer is ripe for a takeover

On top of this, omnichannel retailer Currys (CURY), which sells products such as mobile phones, fridges, televisions and washing machines, has been dealing with the fallout from its unwise merger with Carphone Warehouse in 2014, with the latter’s standalone stores forced to close in 2020 as a result of the changing mobile market.

The shares have fallen by almost 40 per cent over the past five years, and trade at under a fifth of their 2015 peak. Market sentiment towards the company formerly known as Dixons Carphone, has also been damaged by weak trading in its Nordics market and concerns about its balance sheet. No final dividend was paid last year.

Despite all the doom and gloom, however, recent developments support a bullish position on Currys. Takeover approaches this year have highlighted its cheap valuation and future interest (which seems likely) could catalyse further share price gains. Meanwhile, the disposal of its Greek unit has strengthened the balance sheet and a year-end trading update contained some encouraging metrics for both the UK and Ireland (UK&I) and the Nordics. 

Brokers have been taking note of events and raising target prices. Investec argued that "if volumes start to recover, Currys could experience powerful profit tailwinds". RBC Capital Markets added that the company "retains a strong relative market position in a sector ripe for consolidation" and Deutsche Bank said that "with the balance sheet looking more comfortable, risk/rewards start to look more interesting". 

Investors are circling 

Currys' share price has risen from 50p to 70p this year amid takeover interest. Activist investor and Waterstones owner Elliott Advisors had two offers for the whole company, at 62p and 67p a share, rebuffed in February. Currys argued that the bids undervalued the business, a conclusion supported by its biggest investor, asset manager Redwheel. Chinese online retailer JD.com also expressed interest but did not make an offer.

Another shareholder, JO Hambro, said the company should only accept a £1bn buyout. However, Hambro is keen for it to sell the mobile virtual network operator iD Mobile, given the impressive pace of subscriber growth.

Something to keep an eye on is Frasers' (FRAS) 6.59 per cent stake. Mike Ashley could be on manoeuvres, although given Frasers has positions in other retailers such as AO World (AO.) and Boohoo (BOO) the holding shouldn't automatically be seen as a prelude to M&A. 

Either way, future bids are likely to push the shares higher. Analysts at Investec, who think the UK electricals market is heading into recovery mode, argue that the combined value of Currys' domestic 'care and repair' and mobile businesses is greater than the the market value of the entire company. 

Green shoots of growth

Currys has a sizeable online presence, but around two-thirds of revenue came from its 823 physical stores in the 2023 financial year. The company's product areas, in order of revenue contribution, are white goods, computing, consumer electronics, mobile, and services. The trading outlook over the next few years is mixed, with analysts expecting revenue to decline by £1bn over the next two years before rising again in 2026.

The company has a leading market share position in its two remaining locales, serving 24.1 per cent of the UK&I market and 27.6 per cent of the Nordics market, where it trades under the Elkjøp brand. It has been losing some market share as it focuses on margins, but this tactic seems to be paying off. Gross margins are improving because it is no longer chasing unprofitable sales and management is still targeting an adjusted Ebit margin of 3 per cent, with good progress made in the UK and Ireland.

Earlier this month, Currys released an encouraging full-year trading update. Management raised its full-year adjusted pre-tax profit guidance to £115mn-£120mn, up from a previous forecast of at least £105mn. While still well below pre-pandemic levels, this is a step in the right direction. Adjusted operating profits are expected to be in line with consensus in the UK&I and ahead of consensus in the Nordics, where the company expects Ebit to more than double. Interest costs have come in lower than feared. 

For the company to hit its margin target of 3 per cent, up from 2.3 per cent in 2023, organic trading needs to improve – and there are signs that it will. While like-for-like (LFL) sales fell by 2 per cent in the year to 27 April 2024, there was positive LFL growth for the first time since 2021 in the final quarter of the year.

In the UK cost efficiencies are mitigating inflation, while margins are being rebuilt in the Nordics. In the latter market, demand has been hit in the past few years by serious discounting from competitors amid overstocking, but there are signs that the market is now normalising. 

Trading prospects will be helped by an improving outlook for consumer spending as inflationary pressures recede. The GfK consumer confidence tracker, while still negative, showed its best reading for more than two years in May. And, while poor weather contributed to a 2.3 per cent fall in UK retail sales volumes in April, the British Retail Consortium highlighted that “computer sales were boosted thanks to promotional activity and consumers upgrading their tech a few years after the pandemic surge in tech sales”. This represents some tentative good news for the company, and an electronics replacement cycle would be a further boost. 

Balancing the risks

Currys' balance sheet has long been a concern for the market, with good reason. The leverage ratio was 2.7 times at the half-year mark with net lease liabilities of £1.14bn making up the vast majority of debt. Another headache relates to pension liabilities taken on through the Carphone Warehouse merger, as payments have been substantial. A final pension contribution payment is expected in 2029.

Balance sheet assistance has been provided by the sale of the Greece and Cyprus business, Kotsovolos. This completed in April, with Currys receiving cash proceeds of £156mn on a deal enterprise value of £175mn. As well as simplifying the operating structure and letting the company focus on its key regions, the company says the inflow will help it finish the latest financial year in a net cash position (excluding lease liabilities) of around £95mn. 

Currys' cheap valuation is another big draw. The shares trade on just eight times forward consensus earnings, which supports the case for further takeover interest. The rating is significantly below that of the company's rivals, with its UK retail peer group (excluding online operators) trading at around 12 times forward earnings, according to HSBC. Looking at some key European comparators, only Ceconomy (DE:CEC) is cheaper. 

The enterprise value (EV) to sales ratio is another a good way to think about retailer valuations, given the earnings outlook – which underpins PE ratios – is still uncertain. On this basis, Currys is rock-bottom cheap with a rating of just 0.1 times, compared to AO World on 0.6 times and B&M (BME) on 1.1 times. 

Full-year results are in the diary for 27 June. Investors will be hoping for some more signs of positive momentum as management continues its rejuvenation project, but Currys' languishing valuation – and the third-party interest this is sparking – is another key reason to think again about this British retailer.