Dixons Carphone Plc (LON:DC) shares dropped after analysts warned the company is facing a challenging outlook in the UK mobile phone market.
RBC Capital Markets downgraded the stock to an ‘outperform’ rating from ‘top pick’ and cut the target price to 215p from 225p.
The downgrade follows a profit warning from Dixons Carphone last month when it said the UK mobile market has come under pressure since customers have not been upgrading their handsets as frequently due an increase in price of handsets.
READ: Dixons Carphone plunges as it warns on profits with UK mobile phone business hit by weak demand
“We think valuation is attractive, Dixons Carphone has material international exposure (circa 30% of profit) and it is gaining share in electricals, but it faces further mobile headwinds short term which means EPS (earnings per share) visibility is low,” RBC analyst Richard Chamberlain and Shelly Xie said in a note to investors.
Due to low earnings visibility in mobile, RBC lowered its EPS forecasts for 2018 to 25.13p from 25.39p previously and for 2019 to 27.17p from 27.43p.
Short-term headwinds
The analysts said demand in mobile has been affected by higher new handset prices and a lack of compelling technological advancements, with customers moving more to post-pay SIM-only deals.
These short term headwinds are unlikely to ease, RBC added, so Dixons Carphone has to invest more in its offer and margin to maintain share.
Yet the analysts noted that Dixons has been increasing its share of the European electricals sector, supported by competitive pricing and strong support from suppliers.
“The European electricals space has started to consolidate over the past 1-2 years and we see potential for further activity as many markets are still fragmented and as the leading retailers have been gaining share, highlighting the benefits of scale in the face of online competition,” they said.
RBC said Dixons Carphone is trading at less than 7 times its forecast of fiscal year 2018 EPS and offers a dividend yield of 6.5% if the company maintains its dividend this year.
Shares fell 2.32% to 168.60p in morning trading.